The spectre of inflation
Inflation - i.e. the rate of increase in the cost of goods and services for everyday needs - amounted to 2.9% in Austria in July this year - the highest level since 2011. Producer prices in the manufacturing sector have even risen by 8.6% compared to the same month last year. But how great is the risk that inflation will remain in the long term?
The current inflation has several causes: During the pandemic, consumers had fewer occasions and opportunities to spend their money. At the same time, their income was largely protected thanks to generous support instruments. As a result, the savings rate doubled in 2020 - and this money is now being spent on industrial goods and services, for example in the hospitality industry and on travel - in other words, on sectors that have adjusted their prices upwards to make up for losses suffered. The high demand is also currently being met by a continuing limited supply; capacity problems in the supply chains are also contributing to this, with pandemic control measures in Chinese ports paralyzing the supply of consumer goods in this country. The so-called base effect is also responsible for the fact that inflation is so high: the level of inflation always refers to the change compared to the previous year. And in July 2020, prices were particularly low due to the lack of demand and very low crude oil prices.
In itself, the inflation we are currently seeing is no cause for concern. It will stabilize again after the pandemic as soon as the economic upturn subsides - probably around the middle of 2022. Nevertheless, we must remain vigilant if, for example, the currently higher inflation rates are given greater weight in the wage negotiations planned for the autumn. Wage agreements above 3% or 4% would lead to additional demand, which would further fuel inflation. This so-called wage-price spiral could then actually reinforce inflation - and the fear that this could be the case is by no means exaggerated: Traditionally, the first agreements in metalworkers' negotiations are an indicator for all subsequent collective agreements, and the industrial sectors in particular are currently facing a very high shortage of skilled workers. The pressure on employers to adjust wages upwards is high. However, further inflation could then also require a reaction from the central banks - such as an increase in the key interest rate, which would not be so easy at the moment due to the risk of a debt crisis.
In the long term, inflation is influenced less by economic fluctuations than by structural components and monetary policy. The current loose monetary policy is primarily fueling asset prices, while there is talk of record levels of excess liquidity on the financial markets. Investors are using it to buy shares, real estate, gold and corporate bonds, and the prices of these assets are rising. This phenomenon is known as "asset price inflation" and is currently affecting real estate in particular: House prices rose by an average of 11.6 percent in 2020. The price of apartments rose by 7.4 percent and rents increased by 5 percent - despite the profound economic crisis. In part, these figures contribute to general inflation, but in the longer term, the ageing of society is also an important driver of inflation: An increasing number of older cohorts with high incomes are coming up against fewer and fewer younger cohorts who are still producing goods.
Whether temporary or not: anyone who has money in their savings account is naturally not happy about inflation. Even low and temporary inflation is particularly problematic in Austria because most savers lose money due to negative real interest rates on their savings account balances. Only around 5 percent of people in Austria own shares, compared to around 25 percent in Denmark and Switzerland. Good financial education would therefore be the best insurance against the spectre of inflation - in the short and long term.
