Inflation in Germany: Risky inflation surcharge

Dhe inflation in Germany is higher than it has been in 28 years. The Federal Statistical Office confirmed on Wednesday the last reported monthly increase of 4.1 percent compared to the previous year. The central question is now: How bad is that really?

Experts bring this up as the strongest argument against overly great worries: The price increase in many areas is only temporary, the prices that have fallen deeply during the crisis are now recovering or are only increasing as a result of short-term bottlenecks in the course of the economic recovery. Because, for example, the price of crude oil in the pandemic year 2020 was so extremely low, the comparison with the previous year is currently exaggerated: the current inflation rates are “oversubscribed”.

The price of CO2 remains

This effect does exist, but it doesn’t explain everything. For example, if you look at why petrol has become so expensive that it will soon reach its all-time high from 2012, you come across a mélange of reasons. The price increase in the course of climate policy via the CO2 price, for example, is not going to go away anytime soon, but is to be expanded.

In the past twelve months, however, the price of CO2 only made up a small part of the rise in gasoline prices. The increase in the price of crude oil was more decisive: it is a consequence of the fact that high demand meets a rather restrictive subsidy policy by the oil countries. It is plausible that the oil countries cannot have any interest in the oil price climbing too high because that could reduce demand. But that’s not a safe bet.

Whether the sharp rise in energy and raw material prices results in permanent inflation will depend not least on whether wages react to prices and a wage-price spiral develops. The current situation in which the unions are, could be compared to the prisoner’s dilemma in game theory. If there is no inflation premium in all collective bargaining, there will be no spiral.

For each individual union, however, the incentive is high to charge a premium and to try to enforce it in order to compensate for the increased prices at least for its members. The likelihood is high that not everyone will be able to resist.

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