Era of permanent inflation – Weidmann’s last greeting to the ECB is a warning
German monetary authorities double their inflation forecast for 2022 to 3.6 percent. The next few years also look bleak. So savers and investors have to act in a difficult stagflation environment – and reorient themselves accordingly.
Bundesbank president Jens Weidmann said anything but quiet goodbye when he left: The Bundesbank’s inflation forecast, which was published a few days before his voluntary departure from office, is more like a bang.
The German monetary institution predicts an inflation rate of 3.6 percent for the coming year, the highest value since 1993. What’s more, according to the forecast, German inflation will be over two percent by 2024, above the level that the ECB has set as its target for price stability in the euro area.
Afterwards, the outgoing Bundesbank President sent a warning to the ECB. Accordingly, the price pressure could become even stronger: “As in the euro area, the upside risks predominate for the inflation rate,” said Weidmann. “Monetary policy should not ignore these risks and remain vigilant.”
This week, the ECB decided at its council meeting to continue the crisis policy until at least the end of 2022. This means that bond purchases will continue and a turnaround in interest rates is still not in sight. The ECB thus remains the outsider among the major central banks.
The US Federal Reserve had previously announced the prospect of three rate hikes for the coming year due to the risk of inflation. And in view of the sharp rise in prices, the Bank of England raised key interest rates for the first time in two and a half years, thus turning interest rates around.
ECB President Christine Lagarde, on the other hand, stressed, in response to repeated inquiries, that inflation would fall again in the medium term and that most of the surge in inflation was due to rising energy prices. The ECB could not do anything about this.
But with this stance, the ECB is receiving criticism, especially from economists in Germany. “The ECB bases its policy on its opinion rather than on facts. It refuses to take note of reality and tramples on its mandate to ensure price stability, ”tweeted the former Ifo President Hans-Werner Sinn.
The Munich economic research institute recently raised its own inflation forecast for 2022 to 3.3 percent. The Ifo Institute predicts a slight decline in growth in the fourth quarter.
Economic output could stagnate in the first quarter of the new year. Such a toxic mix of economic stagnation or contraction with simultaneous inflation was last seen at the beginning of the 1990s. At that time, the Bundesbank was fighting this stagflation with higher interest rates. The key interest rate was eight percent.
The uncertainty about the progress of the pandemic and its economic impact on prices and growth is increasingly spoiling companies. The December Ifo index fell to 94.7 points, the sixth slump in a row. In terms of expectations, the index fell to 92.6 points, its lowest level since January.
Investors are thus in a difficult position: They cannot park the money in their current account because the inflationary consumption of money reduces purchasing power. But a stagflation scenario is also difficult for stocks.
In such an environment, stocks are by no means a sure-fire success because the earnings outlook for companies is difficult and overall sentiment for stocks is depressed. Nevertheless, there is no getting around equity securities in the long term.
According to a survey by WELT AM SONNTAG among 20 leading banks, the strategists expect growth of a good ten percent in the coming year. This would mean that investors would still have a positive return even after deducting inflation of 3.6 percent.
That should also please the outgoing Bundesbank President Weidmann. He once stated in a statement of assets that he owned index funds on the Dax.
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