Is there an escape from inflation?

Experts advise: keep calm!

Prices are rising everywhere, money is depreciating. However, experts advise: keep calm! They see many signs that the economy can recover from the price shock – in about two years, writes Deutsche Welle.

With inflation, money depreciates, which is evident in the increase in prices. The reason is the disturbed balance between supply and demand. It seems logical that the blame lies with the war in Ukraine and the sanctions imposed on Russia. However, inflation started long before that – the impetus was given by the pandemic.

Supply chain issues have stalled production. The demand for various products suddenly turned out to be greater than the supply, and this led to an increase in prices. In addition, there has been a shortage of skilled workers in many sectors for years, driving up wages, which in turn affects prices. Then came the sanctions against Russia. Energy began to run short, and in this regard, it is true that when demand exceeds supply, the result is inflation.

“There is also something that economists call secondary effects. High selling prices of energy and raw materials lead to higher prices of other products and services as well. Inflation already affects practically all goods and services,” says Friedrich Heinemann of the Center for European Economic Studies. If wage increases in the range of double-digit percentages are also imposed now, this could also lead to another increase in prices – the phenomenon is called a wage-price spiral.

Does a recession follow inflation?

Inflation makes everyone poorer because purchasing power decreases. Incomes and savings of private individuals lose value, as well as the equity capital of enterprises – purchases and investments are postponed, and turnover decreases. If countermeasures are not taken, there is a risk of recession.

What is being done against inflation?

Central banks have two tools to fight inflation: raising interest rates and shrinking the money supply. A rise in interest rates should cause people to save more and demand to decrease. But if you need every penny to live now, you won’t save even with high-interest rates.

The money supply contracts when the government buys fewer bonds ie. put less money into circulation. However, countries are currently spending money in the form of bailouts and aid to protect people and businesses that cannot cope on their own from the effects of rising prices.

Could inflation prompt a rethink?

We must not forget the effect, which will be very desirable in the long run. Experts talk about “green inflation”. This effect also leads to higher prices, because during the energy crisis less gas and oil reach Europe, so the supply decreases and the demand remains the same, and energy prices rise.

But this may cause a large-scale rethinking of energy policy – de-dependency and an energy turnaround. Therefore, in the medium term, inflation may lead to a significantly wider spread of renewable energy, which in turn stabilizes prices in the future.

Does everyone suffer from inflation?

Even if money continues to depreciate, inflation will make some richer. Losing are those who don’t have much savings and are now using everything to make ends meet. The same goes for anyone who invested their savings at low-interest rates. “Their real value melts like snow in the spring,” says Heinemann.

The beneficiaries of inflation are usually people with debt because loans (taken out, for example, to buy real estate) shrink when money loses value. As prices generally rise, real estate typically becomes more valuable, and many employers offset at least some of the inflation by raising wages for their employees. However, the former is uncertain as the real estate market was overheated even before inflation and housing is already very expensive.

The country also benefits from inflation, which with cheap money can pay off its debts much more easily – although new loans are, of course, more expensive due to higher interest rates.

What to watch out for in inflation?

Experts agree: keep calm! The fact is that most employers will not be able to compensate their workers satisfactorily because of inflation. This would put many companies out of business and cause prices to rise in a vicious circle. But there are many signs that the economy can recover from the price shock. “According to the current data, we cannot expect a recession like the one observed during the financial crisis in 2009 or the pandemic in 2020,” says economist Heinemann.

Consumer protection organizations in Germany advise people to carefully familiarize themselves with their current financial situation and to think.

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