Inflation numbers are rising in both Europe and the USA. The numbers are exploding, but politicians and central bankers appear relaxed, assuring that the high rates are only temporary. The Federal Reserve is using the word “transitory” to describe inflation. You be the judge. In May, prices rose by 5.0% compared with the same period last year, which topped forecasts. The market had forecast an increase of only 4.7%. This is the highest inflation rate since late August 2008. The strong surge in prices puts pressure on Jerome Powell, head of the U.S. Federal Reserve, as more and more people fear that the inflation numbers could get out of hand in the United States.
Memories of the 1970s are coming back. Back then, the Vietnam War and social reforms tore a hole in the budget coffers. President Richard Nixon tried to plug that hole with an aggressive policy of cheap money. The shot backfired.
Although the crippled economy was boosted by increased demand, prices and wages rose at the same time. Wage increases further fueled inflation. Added to this were price shocks caused by the oil crises. Next came Stagflation, i.e., a combination of economic crisis and high inflation with company bankruptcies and mass layoffs. Despite the problems, the monetary floodgates remained open, leading to inflation rates of up to 14.5%. Could prices explode again?
Experts Warn: A Dangerous Price Cocktail
As in the 1970s, monetary policy is very loose. Since the beginning of the COVID-19 crisis, the U.S. government and the Fed have been pumping massive amounts of money into the economy. Next year, Biden wants to spend $6 trillion. That’s an increase in spending of nearly 37% over 2019. At the same time, the Fed is flooding the markets with money by buying $120 billion worth of securities a month. This is to create jobs that were lost in the pandemic.
In addition, interest rates remain in the cellar. Federal Reserve Chairman Jerome Powell made it clear that no interest rate hikes are planned before 2023. Recently, German economist Friedrich Heinemann of Mannheim-based ZEW warned that in the long run, the current combination of an extremely loose monetary policy with an extremely expansive fiscal policy could become a “dangerous cocktail.”
Former economist Bert Rürup tries to reassure in principle and urges caution: the interplay of expansionary monetary and fiscal policy could cause economic actors’ expectations to skyrocket – despite the lack of rational explanations.
Start to Protect Yourself Now
Ultimately, it is difficult to make a reliable prediction because the development of inflation rates is complex. Many factors, as well as unpredictable events, play a role. During the Corona pandemic, uncertainty is particularly high, and forecasts have been corrected repeatedly in the past. However, high inflation numbers should be considered in any case – also for Germany. Therefore, it is advisable to take action now to protect and increase your assets.