Higher Inflation Rate for Germany in the Longer Term
The inflation rates in Germany and the euro area, which are currently well above the inflation target set by the European Central Bank (ECB), are dominating the current monetary policy debate. There are increasing signs that the higher inflation will last longer than originally expected by most economists and members of the central banks. In its monetary policy decision, the ECB must now weigh the risks of responding too early or too late to elevated inflation. The 38th ifo and FAZ Economists Panel is devoted to the topic of inflation. The survey was conducted from February 22, 2022 to March 1, 2022, with 145 economists taking part.
Economists Expect 4.4 Percent Inflation for 2022
The economists participating in the 38th Economists Panel expect an average inflation rate of 4.4 percent for Germany in 2022. For 2023, the average inflation rate expected for Germany falls to 3.4 percent. Nevertheless, this figure is still well above the ECB’s inflation target. The expected average inflation rate for 2026 is also still above the ECB’s target at 2.8 percent. If one follows the inflation expectations of the participating economists, a longer-lasting increased inflation rate is to be expected for Germany.
Energy and Commodity Prices, Supply Bottlenecks, and Monetary Policy Are Current Inflation Drivers
The participants in the 38th Economists Panel see rising energy and commodity prices as the most common causes of current elevated inflation – boosted, in responses received since February 24, 2022, by Russia’s attack on Ukraine. They frequently cite supply bottlenecks and pandemic-related effects (catch-up effects in consumption coupled with supply shortages) as well. They also see the ECB’s monetary policy as a major cause of the current consumer price increases in Germany. Figure 2 shows the free-text responses of the participating economists in graphical form. Words that appear larger in the figure were mentioned more frequently by the economists.
Economists Call for Immediate ECB Action to Lower Inflation
Three-quarters of the participants in the 38th Economists Panel believe that the ECB should take immediate action to lower inflation. Only 19 percent oppose an immediate ECB response. The main reason given by the participating economists for immediate intervention is that the current high inflation expectations must not be allowed to settle at a permanently high level. Moreover, at the current rate of inflation, there would be a danger of a wage-price spiral. Those economists who are against an immediate reaction by the ECB are calling for measures to be taken only in nine months on average and justify this, among other things, by saying the inflation rate will automatically fall after the coronavirus pandemic.
Economists in Favor of Key Interest Rate Hikes
With regard to the ECB’s monetary policy instruments, which are to be used immediately or at a later date in 2022 to achieve the goal of medium-term price stability, a good two-thirds of the participating economists favor an increase in key interest rates. The reason given for this is that the measure would have a major signal effect and interest rates are currently too low. When asked how high the ECB’s key interest rate for the main refinancing operation should be at the end of 2022, the participants give an average rate of around 1 percent. In each case, around 40 percent of the participating economists call for the targeted longer-term refinancing operations (TLTROs) not to be relaunched and for quantitative easing (QE) to be reduced or stopped altogether. Just over one in ten want the ECB to take other measures such as selling bonds. Only 4 percent do not support any measures by the ECB to ensure price stability in the medium term.
Ökonomenpanel: Inflationsrate von 4,4 Prozent für 2022 erwartet
ifo Institut, München, 2022
ifo Schnelldienst, 2022, 75, Nr. 03, 35-37
