She rises and rises. Inflation in Germany was ten percent in September; there has not been such an increase since 1951, according to the Federal Statistical Office. Many people despair in view of the high cost of living. The European Central Bank is responsible for fighting inflation. Ensuring stable prices is their core business. It’s the only justification for their existence, but Europe’s monetary authorities have not done well over the past year and a half. They have underestimated the price risks for longer than other central banks. At least she has ECB recently raised the key interest rate in two steps from zero to 1.25 percent, and the next “XXL” interest rate hike is to follow in October.
The central bankers are finally taking action, but it is doubtful that prices will soon rise less sharply as a result. Classic monetary policy only takes effect with a time lag. Experience has shown that it takes nine to twelve months before higher interest rates put the brakes on consumption and investment, with a price-dampening effect. There is also the fear that demand would fall anyway due to the global political situation if Germany and the other euro countries slide into recession next year. According to the economic research institutes, that’s what it looks like. The central bank would have to justify itself again. In the worst case, high key interest rates exacerbate the recession.
The height inflation is mainly due to energy prices. The ECB has little influence on this: if gas suppliers like Russia no longer deliver, the price will rise – no matter how high the key interest rate is. But in the meantime, prices are also rising in all other sectors of the economy. Inflation will be above the monetary authorities’ target of two percent next year and probably the year after that. Public confidence in the central bank is waning. That is why ECB President Christine Lagarde and her colleagues are now showing toughness. Not a speech goes by in which they don’t say: inflation has to go down, even if it means a recession. This statement is not really reassuring either.
People are right to worry about their future. The high cost of living is a major existential threat, especially for low-income households. In Germany in 2021, around 4.9 million pensioners had less than 1000 euros a month net income at their disposal – the proportion of low and low earners has also increased among the younger population. In addition, energy-intensive businesses such as bakeries are particularly hard hit by inflation.
Financial aid can only be given to those in need
The federal government and the other euro countries should provide these people and companies with appropriate financial support. But to do this, governments will have to take on additional debt. It’s not as easy as it used to be. Investors are demanding ever higher interest rates on government bonds. In Great Britain, the new government relied on higher debts, which resulted in a crash in the British currency. The Bank of England had to step in as a savior on Wednesday. Long-term debt sustainability is also no longer guaranteed in some euro countries. The ECB has already launched a rescue program in case speculators trigger a second euro debt crisis.
The high inflation will not go away anytime soon. Even the ECB has no tool at hand to solve this problem quickly. At the same time, the euro countries have to budget with their funds. The public financial aid to compensate for the strong price increases must therefore only go to the needy groups in a targeted manner. To help these people as much as possible – that is not only a requirement of fairness. A watering can is also out of the question because this political measure could increase the inflationary pressure: low-income earners put the state subsidy into paying the energy bill – and nothing else. People with higher incomes who can afford the higher electric bills would use the extra money to consume – further fueling inflation.