Will inflation ever fall?

Expert warns of inflation: "At some point the situation will overturn"

In Germany, the monthly inflation rate was negative three times in 2020.

The rate is also well below the ECB's target of around two percent across Europe.

Nevertheless, experts warn: inflation is there, but so far only in assets. If it arrives in the real economy, there is a threat of sharp price increases.

The financial crisis more than ten years ago was the starting point. The central banks around the world reacted with drastic interest rate cuts - the Federal Reserve in the USA, for example, lowered the interest rate to 0.25 percent in December 2008 - it stayed there for several years. The ECB also gradually lowered the interest rate, which was more than four percent before the financial crisis, to zero percent. Since March 2016, banks have no longer received interest on money that they park at the ECB.

The plan behind it: banks should not hoard the money, but rather give it to consumers and companies as a loan, which should make investments and stimulate the economy. In addition, the central banks have bought trillions in bonds over the past few years - also with the aim of driving inflation.

Because although a lot of money is flowing into the markets due to the low interest rates, it is difficult for the ECB to achieve the actual goal of price stability. The central bank had always set an inflation rate of just under two percent as a target - but the values ​​are far from that.

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According to current economic theory, low key interest rates cause inflation because there is more money in circulation. But: In Germany alone, the rate was even three times in negative territory this year, despite a key interest rate of zero - so prices are even falling. The reason for this is cited by experts as the lower VAT, which is intended to encourage consumers to consume in the corona crisis.

Deflation: The Specter of Economics

Falling prices in the long run are considered a horror scenario for the business world. Such deflation is difficult to break because consumers postpone spending into the future with the prospect of ever-falling prices. Falling demand keeps prices falling. Even economists cannot predict whether goods will continue to become cheaper after the corona crisis or whether inflation will pick up again.

“It is a mistake, however, that inflation has come to an end,” says Thomas Mayer in an interview with Business Insider. He was chief economist at Deutsche Bank and currently heads the Flossbach von Storch Research Institute. “A look at consumer prices is not very meaningful. After all, we've seen a significant increase in assets for years, ”said Mayer.

By this he means, for example, the price rally on the stock markets or rising property prices. To this day, a large part of the additional money remains in the cycle of the financial markets. “When someone buys a condominium, the money changes hands. The seller may invest it in stocks, but at some point the point will come when this money goes into the real economy or services, ”predicts the economist. When this point in time will be and how much the prices for goods could then rise can hardly be forecast.

Fund manager expects double-digit inflation rates

But there are warning voices. Fund manager Hendrik Leber from the capital management company Acatis recently told “Focus Money” that he expected double-digit inflation rates to come within the next ten to twenty years.

Thomas Mayer does not want to commit to specific figures, but outlines the extreme case: “In the worst case, consumers lose confidence in money. They want to buy goods quickly because they are worried that the price would run away from them, ”he explains. The result: rising demand and thus further rising prices.

In theory, it would then be at the ECB. You would have to raise the key interest rate - but that is hardly possible in practice. "Many countries in Europe are heavily indebted and cannot cope with higher interest rates," explains Thomas Mayer. Debtors would threaten to go bankrupt and with it a new debt crisis.

Rising wages and rising prices suggest inflation

"The ECB has been in a huge experiment for years," warns Mayer. The outcome seems open. Mayer does not expect hyperinflation, as in 1923, when people calculated in bundles of money and no longer in bills. However, significantly higher inflation rates than recently appear to be the most realistic way out of the current signs.

The economist points out another example: In the coming year, emissions trading for fuels will start with a fixed carbon dioxide price of 25 euros per ton. The ADAC expects that the liter of petrol will rise by around seven cents and the liter of diesel by around eight cents. "As the cost of living rises, the unions will demand higher wages," explains Mayer. More money means more consumption, which further drives prices up.

"At some point the situation will overturn"

"The development comes by itself. Nobody can predict it exactly, but at some point the situation will change," he warns. Currently, consumers are spending less money despite the lower VAT. The Corona requirements, such as closed catering establishments, and the generally uncertain situation ensure that savings rates are increasing worldwide.

But if the economic situation normalizes, the money will be looser again. "We have significantly increasing prices, we must and only not concentrate on the shopping basket with which the official inflation rate is calculated," says Mayer. If this inflation spreads to the real economy, consumers expect prices to rise significantly. The monetary policy experiment that began after the 2008 financial crisis could soon take a new turn.