SRH AlsterResearch AG: Too much Hype about Inflation in Germany?

Prof. Harm Bandholz takes a fresh look at inflationary risks in Germany

Hamburg (pta011/18.11.2021/09:22 UTC+1)

Any student of economics has come across the quote by Milton Friedman (1963): „Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output." This relationship has found its way into all standard macroeconomic textbooks in the form of the quantity equation and quantity theory. The only problem is that the data speak a completely different language: for the last 20 years, massive increases in the money supply have not led to any sustained rise in the inflation rate in the euro zone. The main reason for this divergence between the money supply and inflation is the increased demand for liquidity and the drastic slowdown in the velocity of money.

So what else is driving inflation, if not the money supply? In Germany, it seems to be a combination of various special factors: 

1) For the second half of 2020, the German government reduced the value added tax from 19% to 16%. The return to the regular level in 2021currently adds roughly 75 to 100 bp to the inflation rate. 

2) The CO2 tax introduced in January 2021 adds another 50 to 110 bp to the inflation rate.

3) The rising energy costs are currently contributing about 100 bp to inflation.

4) And finally, a demand rebound, fueled by high savings rates and massive stimulus programs, combined with disruptions in supply chains, have led to supply shortages that sent prices higher.

These factors will continue to dominate the inflation rate into H1 2022, even if prices stop to rise. However, under reasonable assumptions, inflation rates will peak in November and ease towards 2% in the coming spring. 

What about the dreaded second-round effects and wage-price spirals? So far, collectively agreed wages have only risen by 1.6% in H1 2021, and the number of agreements up for renewal in the next half year only cover 1.6m employees. By the time the larger agreements in the metals and electrical industry and in public services are negotiated later in 2022, inflation should have dropped significantly.

In the medium term, inflationary risks thus seem moderate. Once the discussed base effects subside, structural factors like digitalization and globalization could kick in again. Moreover, there could be an inventory overhang once supply chains normalize, even putting downward pressure on prices. So the ECB can afford to take its time in moving away from the current ultra-loose monetary policy.

About this article: This is AlsterResearch’s summary and translation of the original article "Zu viel Hype um die Inflation" by Prof. Harm Bandholz: https://macro-to-go.com/2021/11/09/zu-viel-hype-um-die-inflation/ For the full article in English with further details and graphs, click here.

About AlsterResearch: AlsterResearch is an independent equity research house, providing MiFID II-compliant research on more than 70 German stocks. The research is available on the digital research platform ResearchHub (https://research-hub.de/) or via an EMail subscription free of charge or obligations. AlsterResearch also regularly hosts roadshows, roundtables and conferences with key people in interesting companies.

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