That inflation, i.e. the devaluation of money, is a kind of tax may be a “truism”. Yet it is true. Unlike a tax, however, it does not affect everyone equally; it hits poorer sections of the population in particular. Energy cost subsidies for housing benefit recipients and other things don’t help either.
At the beginning of February this year, the inflation rate in the euro zone was still 5.1 percent. At the end of March 2022, it jumped to an average of 7.5 percent. This is the highest level since the introduction of the euro.
In four euro countries, the rate is now in double digits. According to Eurostat, it is 14.8 percent in Estonia, 15.6 percent in Lithuania, 11.2 percent in Latvia and 11.9 percent in the Netherlands. Germany registers 7.6 percent.
In February of this year, the ECB still expects inflation to fall over the course of the year, i.e. with a temporary phenomenon, and was of the opinion that inflation was being driven by “special factors”. The monetary authority is currently assuming an increase in prices of 6.0 percent in 2022, as announced on Friday. How this can be achieved given the expected wage-price spirals remains at least a mental exercise.
The ECB’s homepage states: “The main objective of the ECB is to keep prices stable. We work for the people in the euro area and ensure that the value of the euro is preserved.” And further: “Stable prices are the best contribution that monetary policy can make to economic growth.”
There can be no question of that. The Governing Council met before Easter. The ECB had a hard time with its decision on interest rate policy; rather, she did nothing. The Council decided to leave the key interest rate at the previous level of zero percent. A turnaround in interest rates is therefore apparently not in sight. The ECB does not appear to be reading the signs of the times.
The ECB’s bond purchase program called APP, i.e. the transfer of the “securities” of government debt to the ECB’s balance sheet, “should be EUR 40 billion a month from April and then drop to EUR 30 billion a month in May and then to EUR 20 billion in June,” writes the Handelsblatt. “The data received since the last ECB Governing Council meeting in March have “reinforced the expectation that the net purchases of bonds should be completed in the third quarter,” according to the central bank’s statement. “The longer the ECB sticks to its very loose monetary policy, the more people’s inflation expectations rise and the very high inflation becomes permanent,” says Commerzbank chief economist Jörg Krämer.
It is also a “truism” that the ECB, as the central bank, buys government bonds or corporate bonds from banks, increasing the amount of money in circulation. If more money comes into circulation, the economy picks up and inflation rises. This is also referred to as “money printing”.
At the end of August 2021, the ECB’s total assets rose to around 8.2 trillion euros. That is around 80 percent of the gross domestic product in the euro area. At the end of December 2021, the euro area was indebted at 100 percent of GDP. The euro area is further away than ever from the stability pact, which set a target of 60 percent.
But back to the devaluation of money called inflation. The ECB is doing too little, actually nothing at all, to at least slow down inflation. It has still not finished buying securities and will probably not finish it until the end of the third quarter of 2022. Key word: probably.
In our neighboring country Switzerland, the price increase is also being debated, even if the rate there remains at 2.4 percent. The dispute among economists is: is there a risk of inflation in Switzerland rising to American or European levels in the medium term?
While a nominal appreciation of the franc is expected in Switzerland, the currency in the euro area is falling. “After the monetary watchdogs once again left open when they would take action against inflation with higher interest rates, the euro fell to its lowest level in almost two years”, below the 1.08 mark, reports Die Welt. This has to do with the fact that the ECB has said it will “eventually” raise interest rates – after the bond-buying program has ended. “A weak euro increases inflationary pressure because most commodities are traded in dollars, making purchasing more expensive.”
Meanwhile, the Deutsche Bank vice warns of a double-digit inflation rate. “Our forecast is that we will be at an inflation rate of seven to eight percent over the course of the year,” explained Karl von Rohr in the Frankfurter Allgemeine Sunday newspaper (FAS). “In the event that energy imports are more severely limited, we could even see ten percent and more.” And further: “Wealth melts like ice in the sun.” haven’t seen since the 1970s.”
With regard to the interest rate policy of the European Central Bank (ECB), von Rohr said that he considers interest rate hikes to be “urgently necessary” “so that inflation expectations do not solidify at a high level.” However, with the current Council decision by the ECB, it does not look like it at all out of. The way to “galloping inflation” seems to be mapped out.