Inflation: Why gas, heating, and groceries are getting so costly

Hamburg. to me gas stations Prices for a liter of gasoline are approaching the euro 2 mark. If you heat a large family house with gas, then you already have to calculate energy costs from 3,500 to 4,000 euros per year, and heating appliances or parquet floors charge an additional 9.4 percent for their work. The famous Mrs. Rumpsteak of the Hamburg restaurant chain Block House costs €20 after two price increases in a few months. And for a pound of coffee in Tchibo, customers will have to pay between 50 cents and an additional 1.30 euros from the end of February. Almost all products and services in the past few months expensive became clear.

If you look at the official shopping cart of the Federal Statistical Office, you can read the latest shopping cart Rising prices On an annual basis as follows: Light heating oil: an increase of 52 percent, Natural gas: an increase of 32 percent, Electricity: an increase of 11 percent, Vegetables: an increase of 8.3 percent, Butter: an increase of 6.3 percent, Auto repair: an increase of 4.9 percent. The list can go on for a long time. After years of price stagnation, it’s back: The economic inflation.

“Initially, people thought that only energy would become more expensive, but now higher energy prices affect many other products and services,” says economist Henning Vobel. The former head of the Hamburg Institute for Economic Research (HWWI) and current director of the European Policy Center predicts an inflation rate of at least three percent for 2022.

Inflation: the European Central Bank must finally give a clear signal on the interest rate

In January 2022 alone, consumer prices rose about five percent year over year. There is no end in sight to this development. How does the European Central Bank deal with its president, Christine Lagarde? The behavior is still well described with French calm. One could also describe doing nothing as arrogance. Arrogance towards more and more families in Europe who hardly know how to pay their gas, groceries and fuel bills for their cars.

The European Central Bank actually holds the key to informing governments, businesses and consumers in Europe that we are doing something about high inflation. And that key is: increasing key interest rates. But she doesn’t use it. Commercial banks and savings banks can now borrow money from the European Central Bank at zero percent and pass these cheap terms on to their individual and corporate clients.

Economist Faubel believes that this is a mistake: “The European Central Bank should raise interest rates at least again this year. It’s time to send a signal to the markets.”

The result of the ECB’s trajectory: incurring debt costs is nil. It is therefore not surprising that young families are borrowing more than what is actually financially feasible for the property, and that house and apartment prices are rising and rising. Average porch house in an average residential area of ​​Hamburg for a million euros? Five years ago, potential buyers were saying that the seller was crazy, but now there is a demand for this property as well.

Dangerous economic insanity

However, if the cost of living continues to rise at the same pace as in the past few months, more and more property buyers will not be able to service their rising loans in the next few years. The former dream house will become a nightmare. From an economic point of view, it is dangerously insane to give up credit.

Because borrowers are becoming very negligent, taking on more debt than they can actually afford. Banks no longer look closely at the creditworthiness of their peers when granting loans, because the competitive pressure on the part of other generous lenders is too great.

Because if you want to do business, you have to reduce the conditions of your competitors as much as possible. If this risky game fails, it will be very expensive. The number of foreclosures and personal bankruptcies increases slowly at first, then faster and faster. The game becomes seriously bitter.

Life is getting expensive, saving is useless

The US Federal Reserve (Fed) has long recognized the dangers of high inflation. Federal Reserve Chairman Jerome Powell announced four rate hikes in 2022. Loans should become more expensive and savings rates should rise again. Because while everyone is currently talking about high inflation, one more thing is almost forgotten: life is not only getting more and more expensive, and at the same time there is almost no interest in savings. On the contrary: hundreds of banks in Germany have always charged their customers with a so-called custody fee, which is nothing more than a penalty interest.

Their reasoning: After all, the banks will also have to pay a fee for the money on hold at the ECB. In this way, the holdings of small savers are practically expropriated: high inflation combined with negative interest rates means a currency devaluation that we have not seen on such a scale for a long time. But rather than sending clear signals about monetary policy to markets – such as Federal Reserve Chairman Jerome Powell – in order to put an end to this rather unhealthy economic development, ECB President Lagarde prefers to sit around and flee to the inaccurate: “There is no There is reason for hasty conclusions.”

Why the European Central Bank should act now

The main reason for the ECB’s procrastination, which even the German Bank views very critically, is simple: if interest rates rise, heavily indebted countries such as Greece, Italy and France will also have big problems in financing government spending and reducing huge mountains of debt.

Suddenly they can no longer borrow money for free and will again have to balance their finances – a policy that many European governments have long forgotten in recent years. However, if the ECB does not react and prices continue to rise at such a rapid rate over the next few months, another very risky development could gain momentum.

Unions may feel called to help workers financially. After all, the collective agreements of nearly ten million employees will expire in 2022. Among other things, powerful IG Metall will enter the wage game with employers before the end of this year. A deep sip from the pay bottle will be programmed to more than three million colleagues in the automotive, aircraft and mechanical engineering industries.

If you look at the collective bargaining demands already known to labor unions, you will almost always find at least five before the decimal point. In addition, the statutory minimum wage will rise to twelve euros from October. The specter of a wage-price vortex is frightening. The mechanism is simple: prices rise, unions pay especially high wages, demand for products and services remains unchecked, and prices rise even more. A dangerous development, the mechanism of which could not have been stopped in earlier times.

Learning from the seventies

A look into the ’70s is definitely worth it here. Also at that time, oil prices rose sharply for different reasons than they are today. Not only energy, but also many other products and services are becoming very expensive. Then trade unions paid through wage increases, some of which were more than ten percent. The wage-price spiral began with annual inflation rates ranging between four and seven percent.

The difference today: savers can absorb at least part of the inflation if they have reserves. Because there was an average of four to five percent interest on three-month savings deposits, and even more than that for fixed-term deposits. At the moment, Germans can only dream of such returns on their savings.

The question remains, where will this explosive and historically unique combination of high inflation and zero interest rates lead if the ECB does not take countermeasures? Obviously the state should fix it – wrong! Governments across Europe are trying to buy social peace with increasingly generous transfer payments. In Germany and other European countries, for example, subsidies for heating costs are now transferred to those in need. The state works to pacify the poorest in society with generous financial assistance.

What will come – instead of vegetables?

Who cares about the middle class? Just a few days ago, the housing industry required the state to reimburse all tenants a portion of their heating bills. What’s Next? Instead of vegetables? Euro coffee state? The very generous Corona aid has already caused debt inflation to increase across the country. This generosity on the part of the state fuels inflation.

Once the money came in, many companies called for fresh help. The problem: a large part of this money is not invested, so it does not contribute to the growth of the economy, it ends up in reserves. This inflated money supply increases inflationary pressures. It is time for the country to reduce its transfer policy to what is absolutely necessary and use solid monetary policy and market-based tools.

Higher interest rates should curb inflation, make old-age savings attractive again and put an end to the housing price frenzy. A temporary reduction in energy taxes would also be more efficient than handing over government checks for heating. It remains to be hoped that after the pandemic the voices of economic reason will rise and that the dangerous combination of extremely generous government transfers, high inflation and zero interest rate policy will become a thing of the past. But that’s the thing with the mind

Updated: Saturday, 02/12/2022, 08:00

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