The good news first: Inflation for February has scared everyone again, but if the first estimate for March comes in a month's time, then the inflation rate will probably fall. Never before had prices risen as fast in one month as from February to March 2022, after Vladimir Putin's attack on Ukraine. The inflation rate measures the price change twelve months back, and if February 2022 is more than a year ago, then these price increases are no longer included.

Patrick Bernau

Editor responsible for economy and "value" of the Frankfurter Allgemeine Sonntagszeitung.

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But the bad news is that prices are not falling. They only rise more slowly – and not even much. At least five percent inflation is already almost certain for the inflation rate in March. And they will be difficult to get rid of in the near future. Why?

Inflation has changed. A year ago, energy prices simply rose. For gasoline and diesel, for gas, and then also for a few scarce foods, for example sunflower oil. Meanwhile, inflation has arrived in the breadth of the economy. Electricity and gas have already come down from their very highest prices. Now food is becoming even more expensive than energy, and many other things have also become more expensive. Furniture: 10 percent more expensive in January. Car repair: 8 percent. The cleaning help: 12 percent. Restaurants and hotels have raised their prices anyway. Flowers, stationery, the hairdresser: everything is more expensive. And this is not only because the hairdresser now costs more electricity for the hair dryer.

Is this already a wage-price spiral?

Wages have already risen sharply in some sectors. In most cases, they did not compensate for inflation, but in hotels and restaurants there was an increase of more than seven percent in some federal states, the building cleaners even got 9.7 percent. Is this already a wage-price spiral in which wage increases further fuel prices? At least you can say that last year's wage increases are now driving prices further. And these days, the employees of many other companies are striking for even higher wage demands.

The employees have strength and assertiveness this time. Staff is scarce everywhere, so it stands to reason that employers do not look so closely at wages – especially for jobs within Germany that are not in competition with foreign countries. This is not going to change. In the coming years, more and more workers will retire, and the gaps in the labour market will continue to widen.

British central banker doyen Charles Goodhart saw this danger a few years ago. Already in 2020, his book landed with the warning on the desks of the most important central bankers. Nevertheless, these central bankers now have a problem, which could no longer be avoided in 2020. So far, the textbook for central banks in times of inflation provided for the following procedure: The central banks raise interest rates, thereby slowing the economy, employees lose bargaining power, wage increases are no longer so high – inflation can be slowed down again.

"In the past, economic weakness also meant weakness in the labour market"

But what if labor is still scarce in a recession, if only because of demographics? And what if employers also refrain from laying off layoffs in bad times in order to retain the employees they urgently need in the next upswing? It's just like this: the workers have the power. Interestingly, in the end, this is also at the expense of themselves in their capacity as customers.

Sylvain Broyer, chief European economist at rating agency Standard & Poor's, expects wages to continue rising for a long time to come – to the point where the cost of products and services will rise by more than two percent a year, more than the target for price increases sought by the European Central Bank.

"In the past, economic weakness also meant labour market weakness," says Ulrich Kater, chief economist at Deka-Bank. "There's not much left of it." He believes that labor shortages need not drive inflation permanently. But his alternative future is not much better. Kater suspects that industries that are in international competition would compensate for wage increases through cheaper production. In personnel-intensive services, however, this is not possible. These, in turn, are often social professions in which the states do not want high wage increases. So many jobs simply remained open.

Supply-oriented economic and energy policy

At the University of Frankfurt, the former economist Volker Wieland has another idea: he appeals to the government. It must now pursue a supply-oriented economic and energy policy, i.e. increase the supply of labour, goods and energy – because then inflationary pressure will also decline. This is not easy to implement either.

And how does it all end in the end? "Central banks need to keep raising interest rates and then look further," respected Chicago economist Raghuram Rajan told the F.A.S. in January. "They will probably go too far and take a long time to revive the economy. But that's just the way the world is."