It’s time to send a signal to the markets

by time news

BerlinYou have to let this number melt in your mouth. Inflation in Germany was 4.5 percent in October – the highest it has been in 28 years. Above all, energy prices have literally exploded. This can of course happen in the upswing, especially after the turbulence of the pandemic. For people with little money, however, inflation is increasingly becoming a problem. Especially since the end of the price surge is unlikely to have been reached yet. The 5 percent mark could be cracked as early as November.

Inflation: DIW boss warns of wage-price spiral

It is not a German phenomenon that prices are rising. Inflation in the euro area was also recently at 4.1 percent. And thus well above the ECB’s target of two percent. It is still true that there are many indications that inflation is only picking up temporarily. But what if not? The head of the German Institute for Economic Research (DIW), Marcel Fratzscher, is already warning of the notorious wage-price spiral. This is a kind of self-fulfilling prophecy: As the unions expect prices to rise, they are demanding higher wages, which lead to even higher prices – and again higher wage demands. As a result, inflation continues to rise.

There is a fine line that central banks walk around the world. Higher interest rates can quickly slow the upswing. But at some point the zero interest rate policy must also come to an end. The Bank of England and the Federal Reserve have already announced that they will tighten their monetary policy. The ECB, on the other hand, wants to leave the key interest rate at 0 percent. Her hands are tied to a certain extent. Many government budgets in southern Europe are dependent on cheap money. The central bank would therefore have to do everything in its power to dampen inflation expectations, if only in its own interest. It’s time to send a signal to the markets.

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