Rising prices: finally good news on inflation

Vfour and a half percent. This is the key interest rate at which the fastest rise in interest rates in the history of the European Central Bank could end. In any case, this is how we should understand what ECB head Christine Lagarde said last Thursday. The decision is not yet final; The ECB is keeping a big back door open in case things don’t go as expected. But key interest rates should actually remain at 4.5 percent for a while and probably not rise further. At least, this is how investors in the financial markets interpreted the words of the head of the Central Bank.

Stock prices have risen quickly because companies won’t soon have to pay more interest on their loans. On the other hand, the euro exchange rate has fallen because euro balances no longer earn much higher interest rates. But none of this should worry the ECB. Its goal is to curb inflation – and can we really say that inflation has already been defeated? After all, Germany’s inflation rate was still above six percent in August. What makes the central bank think that rising prices need not be fought even harder?

Gas is becoming cheaper, agricultural prices are falling

First of all, this is the dynamics of energy prices. Gas on wholesale markets is much cheaper than last year, and gas storage facilities in Germany are almost full today, weeks before the start of the heating season. Electricity is also significantly cheaper than in September 2022. All this further reduces the level of inflation – especially since food products, which are now accelerating inflation, are unlikely to become more expensive. Agricultural prices have been falling since the beginning of the year, says economist Timo Wollmershäuser of the Ifo Institute for Economic Research.

And then the recession comes. In Germany and some other parts of the eurozone, the economy is no longer growing strongly. Individuals are struggling to afford new buildings, companies are suspending investment, and construction companies are going bankrupt. It is much more difficult for companies to achieve higher prices for customers. This is how raising interest rates usually works.

What about the labor market?

But is this time any different from usual? Namely the labor market? Recession or not, unemployment has barely risen yet. At the very least, the German economy still has a huge talent shortage even after two years of inflation, and demographic changes ensure that the situation will get even worse in the near future. Wages increase accordingly. Collective bargaining agreements are generous, and many employees can also negotiate pay increases on their own. In the spring quarter, workers’ wages in Germany rose 6.5 percent, even faster than prices.

Source: Frantfurter Allgemeine

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