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German economists split and wary over inflation

Three camps have emerged and only time will tell who is right


Pete Carvill

There are limited fears within Germany about higher inflation over 2021, with banks and economists split on how much of an impact increasing prices will have, or if they will even emerge at all.

German newspaper Handelsblatt published a story this week that interviewed the chief economists at major institutions. According to the article, while the European Central Bank (ECB) said it was more concerned with inflation being too low than too high, DZ Bank and Deutsche Bank have expressed concrete fears of higher inflation.

Inflation fears have been a source of much talk and thinking since the beginning of the year. As was written on these pages recently, those fears have been running hot for some time. In that piece, we wrote on how the ECB had changed the definition of its inflation target from ‘below but close to 2%’ to ‘2%’.

Michael Holstein, chief economist at DZ Bank, was quoted in the Handelsblatt piece. He reportedly said that there were parallels between the German economy of the 1960s and 1970s where there was a long period of stable growth, low inflation, and moderate debt, followed by increased government spending. This led to the Bundesbank being unable to keep inflation under control.

Others such as Jari Stehn, chief economist for Europe at Goldman Sachs, were reported as seeing little inflationary pressure. Stehn told Handelsblatt that he expected inflation within Germany to peak at 4% within the country and 2.8% in the euro area, before falling steeply in 2022.

Door number three

Expert Investor reached out to Carsten Brzeski, chief economist at ING-Diba in Germany, and asked him for his thoughts.

“I’m probably in the third camp,” he says, “higher-but-not-high inflation. Currently, all three camps have a point and only time will tell who is right and who is wrong.”

Brzeski says that the ECB is too benign in its short-term outlook, particularly against the background that its president, Christine Lagarde, wanted to better communicate to the people. “How do you explain higher fuel prices and higher hospitality prices as ‘transitory’ if people simply feel it in their pockets?” he asks.

He says the current drivers are higher commodity prices coupled with a strong demand from consumers after the lockdowns.

“Therefore, there is a high probability that higher input prices can be passed on to consumers. Add to this the German VAT reversal and you have the main drivers. A lot will now depend on the pass-through. The ECB argues that there won’t be any pass-through and that these so-called one-off factors will disappear and partly even be reversed next year.” 

He adds: “More structurally, I see two drivers of low inflation over the last decade: globalisation and digitalisation. Globalisation will be less disinflationary or possibly even inflationary in the coming decade. Digitalisation, price transparency, and services becoming more mobile will continue to insert disinflationary pressure. On top of that, the costs of the fight against climate change will also show up in inflation. Consequently, inflationary pressure should be somewhat higher in the coming decade than in the previous one.”