The prices go up and up and up. In Germany, inflation reached 7.9 percent, in the euro zone 8.1. The European Central Bank (ECB) announces a reversal in interest rates, but its room for maneuver is limited. Because the current inflation is not based on demand, but on supply.
Yesterday, the Federal Statistical Office published its calculations for the inflation rate in May. At 7.9 percent in Germany , the rate of inflation is the highest it has been in 48 years, when prices exploded in the winter of 1973/74 because of the oil crisis.
In the euro zone, prices even rose by 8.1 percent. Inflation has not been this high since the euro was introduced in 1999. It is now more than four times above the two percent that the European Central Bank (ECB) is aiming for price stability.
In Eastern Europe in particular, inflation is unstoppable. Already in April, prices in Estonia were almost 20 percent above the same month last year, in Lithuania, Latvia and Slovakia, but also the Netherlands by more than 10 percent. Concrete data for May are not yet available, but are likely to be even higher.
The main price drivers are energy prices, which have risen by almost 40 percent in Germany. They get by on almost everything , from construction to bread. As a result, food prices also increased by an average of 11.1 percent.
For the experts, this is tantamount to an oath of disclosure. For years, the ECB leadership, such as President Christine Lagarde or Council member Isabell Schnabel, has been downplaying inflation . As late as 2020, they claimed that prices were even deflationary on average. When inflation became undeniable, they and scores of other surprised “economists” claimed that inflation was either very small or temporary.
Month after month, reality convicts the “experts” of error. Month after month, the “experts” make further forecasts , which month after month turn out to be wrong again. And yet the experts remain in their chairs. They run economic institutes, make forecasts, run central banks, advise the government and inform the media.
Resignations? Admissions of Error? No no. Being wrong again and again is no reason to give up the claim to advise God and the world and to lead the monetary policy of the euro zone.
The other kind of inflation
At least one has to say in favor of the ECB that the inflation, which has been warned about for so long, is only partly to their account.
For a long time, the ECB has operated economic policy with the money press. It has lowered interest rates to encourage investment and bought government bonds to give nations fiscal space. In doing so, it has increased the money supply and created mild inflation, while the market tended towards falling prices.
Inflation was demand-injected: the expanded money supply increased the demand for goods. It was relatively easy to protect yourself against this inflation by not saving in euros, but in gold, stocks, cryptocurrencies and real estate. Since the ECB has been pursuing this policy with the financial crisis of 2008, asset prices have risen massively.
The current inflation, however, is caused by supply: the aftermath of the corona policy, the ongoing lockdown in China, the Ukraine war and the geopolitical upheavals it has caused are leading to a global shortage of goods. This has been felt for a long time with chips and graphics cards, but has been affecting raw materials for a few months, the prices of which are increasing across the board, mostly at mid double-digit rates. The massive increases in purchase prices are now reaching consumers, albeit by no means in full.
Accordingly, the “experts” are now rumoring that food will become even more expensive and that inflation will continue. So you’re saying exactly the opposite of what you said six months ago. It will be interesting to see what forecasts they will make in the fall.
What helps, what protects?
Unlike demand-driven inflation, investments are now less protective. The high prices hit the economy; Inflation no longer creates growth as it did before, but rather causes the economy to shrink. Stock prices plummet, gold plummets, cryptocurrencies collapse. It should only be a matter of time before real estate follows suit. Industry circles are already reporting a massive drop in demand for new buildings.
But what helps against such inflation? Ultimately only one thing: the readjustment of supply and demand. When supply falls but demand remains, prices rise. They will only stop doing so when either supply increases or when demand decreases.
A recovery on the supply side does not appear to be in sight at the moment. She will come without a doubt. But until then, the only adjusting screw that remains is demand. The American Fed is already curbing this by raising the key interest rate, and the ECB is promising to follow suit in the autumn. The expectation of rising interest rates alone should partially explain the slump on the stock and crypto markets.
But the instrument of central banks has its limits. If interest rates rise too much, there is a risk of real estate crises because it becomes more expensive to service the loans; if savings accounts become too attractive, there is a risk of further stock market slumps. Neither a real estate nor a stock crash would be what the markets could use in the current situation. Inflation will continue until supply problems are resolved, while interest rate crises could trigger a contraction in the economy. The dreaded stagflation would be the result.
Above all, consumers are left with an option. Bitcoiners and HODLERs have often been practicing this for a long time: saving. Decrease the time preference. Reduce needs, flip each satoshi twice. If consumers cut back on spending, if they only buy seasonal fruit and vegetables, ride their bikes instead of cars, hit the gas less aggressively, mend their pants instead of throwing them away, they help to make the distribution of goods more efficient – and thus in the long term fix broken supply page.