Open Europe Blog

That’s today’s front page of German daily Handelsblatt, with the headline asking “Where is the inflation?”

A stark reminder of what remains a key issue in German (and therefore European) politics. We could barely ever imagine such a front page in the UK, particularly when annual inflation is running at only 1.6% (August 2013).

Inside the paper there is a ten page section discussing the issue. Essentially, Handelsblatt is questioning why, when there has been such significant money printing and low interest rates in the eurozone, is there yet to be inflation. This is put in context with a comparison to the hyperinflation of the 1920’s Weimer Republic, another reminder that this episode in the country’s history continues remains firmly embedded in the German psyche.

The discussion itself is obviously hugely technical, but the paper’s explanations for why inflation is (yet) to show up is quite telling about the debate in Germany.

  • Central banks only measure consumer prices – the paper essentially suggests that the usual metric of inflation, the Consumer Price Index (CPI), does not fully capture the real inflation rate since it does not include things such as asset prices and house prices.
  • The increased money supply is not feeding through to the real economy – the suggestion here is that, although money supply is being increased significantly, it is not feeding through to the real economy because banks are not lending out and because people and companies are saving more. It could also be down to the fact that banks, companies and the government are deleveraging (paying off debts and reducing their size) in order to become more stable in the wake of the crisis. For these reasons, the money created has stayed within the financial system rather than leaking to the wider economy and hitting inflation – at least not yet.
  • Still too early to fully judge the impact of the ECB’s policies – this seems to be linked to the argument above but the paper suggests that the low interest rates and other non-standard measures which the ECB has undertaken (such as unlimited long term loans) are yet to have their full impact. The suggestion seems to be that, as the economy recovers, the true impact of the policies will become clear.
  • So, what will happen? The paper concludes that these policies are likely to have some impact and that inflation will show up at some point.

Although this is clearly just the view of one paper, the tone and line of argument here is quite telling.

Clearly, there is still concern that inflation will show up and even that it may already have and be going unnoticed. This fits with recent concerns raised by the Bundesbank that low interest rates and loose monetary policy can pump up financial bubbles and set the scene for the next crisis.

This debate is here to stay in Germany and Europe. As the ECB considers further long term lending operations (LTROs), how to deal with actions of other central banks and the large divergence in growth between Germany and some struggling countries, it could come to the fore once again. 

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