Thursday, October 22, 2020

Expensive vegetables, cheap tank filling. How prices are developing now

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Heating and refueling are becoming cheaper, and food is becoming more expensive. Economists argue about how to proceed: is inflation coming – or is it the opposite, deflation?

Inflation has already arrived in the garden. If you wanted to buy a new garden hose in May, you had to pay significantly more than in previous years. Otherwise it costs an average of 67 euros, it was recently 81 euros. The price of garden hoses has therefore risen by 21 percent. And garden chairs, tables and parasols have also become more expensive.

Is that because the Germans spend so much more time in their garden this year? That they are therefore willing to spend more money on garden hoses ? Or could prices for other goods rise sharply in the long term?

Economists argue about the latter question. While some fear inflation, others warn of deflation and thus the opposite: namely of falling prices. Both are dangerous.

Excessively high prices are a burden on the economy because people cannot afford it. Falling prices also lead to a downward spiral: Companies and consumers are delaying purchases because they believe that the machine or car will be even cheaper next month. Demand is falling, the economy is slumping.

Central banks prefer to accept slight inflation

To avoid the latter, the central banks are targeting slight inflation of two percent. Because even if prices remained constant, consumers and companies could come up with the idea that they would soon fall. They would then be reluctant to make purchases, so companies would actually have to cut prices. It is difficult to get out of there. That is why central banks prefer to accept slight inflation.

At the moment, however, we are a long way from this ideal price increase. Because even if the prices for garden hoses and parasols rise sharply, the overall inflation rate is very low. It was 0.6 percent in May.

It is depressed primarily by the low oil price. Due to the shutdown, much less fuel has recently been requested, which has caused prices to plummet. For example, heating oil was 30 percent cheaper in May compared to the same month last year, and fuel was almost 21 percent. This is shown by the detailed figures that the Federal Statistical Office published on Tuesday.

Food has become noticeably more expensive

How much consumers benefit from the lower energy prices depends on whether they drive a lot or have oil heating. If you calculate the energy prices, the price increase, on the other hand, comes much closer to the ideal value at 1.6 percent. And the perceived inflation is likely to be even higher. Because groceries, where people feel the price increase immediately, have recently become 4.2 percent more expensive.

This places a particularly heavy burden on people with low incomes. Researchers at the University of Hohenheim are therefore currently investigating more closely how inflation has become apparent in a specific court since the outbreak of the corona crisis: Chili-con-Carne. The interim result: From the beginning of February to the end of May, the ingredients for chili con carne became 7.5 percent more expensive.

This is mainly due to the vegetables: the price of peppers rose by 15 percent during this time, and by 13 percent for tomatoes. In addition to the lack of harvest helpers, this is also due to the fact that vegetables are mainly imported from countries that are heavily affected by corona. Spain, France and Italy, for example. “If the inflation rate remains constant, consumers will have to expect to dig deeper into their pockets for food this year,” the researchers write.

Is loose monetary policy driving prices up?

Then there are the consequences of monetary and bailout policies. Enormous sums of money are currently flowing into the economy through the central bank’s bond purchases as well as KfW loans and emergency aid. “The money is pumped into the economic cycle, but this means that there are no longer any goods,” said fund manager Martin Siegel in an interview recently. If a lot of money flows into the market, but production does not increase, higher prices are the result. “Anyone who can push through higher prices will do the same,” he says.

What became more expensive and what became cheaper in May

The experience made after the financial crisis speaks against this. At that time, the large sums that central banks and politicians pumped into the market did not lead to high inflation. One explanation for this is that tech companies such as Google and Amazon are so transparent today that it is difficult to raise prices. The analysts at DZ Bank then also write: “We do not expect inflation rates to rise sharply simply because of the high level of liquidity in the markets.” Many arguments that would have depressed inflation rates in the past would continue to apply.

Deflation could threaten

The former economy Peter Bofinger believes that we will even talk about deflation in the long term. He explains it this way: With rising unemployment, companies can again enforce lower wages. If they have to pay their employees less salary, they can sell their goods more cheaply.

At the same time, people are spending less money with rising unemployment . This can already be observed to a certain extent: Many are already holding back on making larger purchases – be it for fear of being infected in the shopping center or for fear of losing their jobs. At the same time, however, the stock of the dealers is full. Electronics or furniture retailers react to this with sometimes substantial price reductions of 20 to 30 percent.

You can find all the important updates of the day for the corona virus in the free Tagesspiegel newsletter “Questions of the day”. The most important news, reading recommendations and debates. 

And as of July, there will also be a reduction in VAT . It too has a rather deflationary effect. If all companies passed the tax reduction on to customers in full, this would reduce consumer prices by 1.6 percent, the Federal Statistical Office calculates. The result would be a negative inflation rate – in other words, deflation.

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