SGreat 9.1 percent inflation in the euro area, at least 7.9 percent in Germany according to the national calculation method, as the Federal Statistical Office confirmed on Tuesday. Energy prices are not the only thing that puts a strain on the wallets of many consumers. Food, from bread to meat, is also becoming more and more expensive. Many people are already wondering: how do we get down from there? The European Central Bank (ECB) raised interest rates in two steps, by 0.5 percentage points in July and by 0.75 percentage points just under a week ago. It has also announced further interest rate hikes. But will this intervention by the central bank work now?
One person who is skeptical is the economist Marcel Fratzscher. The President of the German Institute for Economic Research (DIW) in Berlin has put forward the thesis that the central bank’s instruments are not sufficient or not effective enough to get inflation under control in the foreseeable future. He cites two main arguments: First, the main cause of the high inflation is an increase in the price of imported goods that are beyond the ECB’s control, above all energy. And secondly, steps taken by the ECB only had a time lag, interest rate hikes only became fully effective after a year and a half. The ECB should rather admit that it can’t do this at the moment than raise expectations too high.
Like showering in an old hotel
Other economists even go a step further. Sebastian Dullien, scientific director of the institute for macroeconomics and economic research, which is close to the trade unions, writes on the short message service Twitter that the ECB cannot influence inflation for the next few months anyway. And if it now raises interest rates in a looming recession, there is even a risk that inflation will undershoot and end up below the ECB’s 2 percent target. The result would be remarkable: the central bank could then worry about inflation that is too low instead of too high. Some fund managers are also arguing at least something in this direction: According to market commentaries, inflation will fall of its own accord, if only because of the recession.
The central bank itself has recently expressed caution about the chances of success of its interest rate hikes to combat inflation – but by no means gave the impression that it expects no effect.
ECB President Christine Lagarde said in the press conference after the interest rate decision that nobody should expect inflation to fall back to 2 percent in the next three months. And ECB Executive Board member Isabel Schnabel, in a discussion with economists Paul Krugman and Larry Summers at the Fed’s annual research conference on Tuesday, raised the issue that what the ECB is doing now isn’t yet having an impact on winter inflation. Summers said: Yes, it’s like an old hotel – where you turn on the faucet when you shower, but unfortunately the temperature reacts with a delay.
