Devaluation
"Inflation is when wallets are getting bigger and shopping bags are getting smaller." These were the simple words once used by the 1927-born US author and comic Robert Orben to explain inflation. The proposition behind them is that rising prices reduce the value of money. Where this can lead is demonstrated by extreme periods of hyperinflation, such as those seen in the 1920s, when money presses were fired up and more and more money came into circulation. Despite the rising number of banknotes, though, sometimes even carted about in wheelbarrows, the material equivalent declined constantly.
Flood of capital
In the present, too, money-printing machines are working flat out. Although the amount of money around the world began increasing longer ago than in the 2009 financial crisis, the pace has picked up sharply since then. While the M1 money supply in the eurozone, which in addition to notes and coins also includes credit balances in current and savings accounts, stood at around EURtn 4 at the start of 2019, by December 2021 it had shot up to over EURtn 11. In today's monetary system, though, the expansion of the money supply did not lead to exploding prices, at least not for day-to-day necessities. Instead, what is known as asset price inflation is occurring, with the money flowing into stock markets, real estate and, now, cryptocurrencies as well.
Life is getting more expensive
Recently, though, inflationary pressures have reared their head again across a broad front. The inflation rate in the USA has had a 7 before the decimal point for months already, and currently stands at its highest level since the middle of 2008. The cost of living is climbing sharply in the eurozone at the moment, with consumer prices rising 6% in February, compared to 0.9% a year ago. Producer prices for industrial products in Germany received a real boost in August, a substantial 12% higher than on the same month the previous year. The last time a bigger rise had been seen was in the oil crisis in December 1974.
Lasting!
The spectre of inflation threatens to hang around for some time to come due to the second-round effects. There is, firstly, a danger that manufacturers will pass on to their customers the increases they are seeing in their purchase prices – raw materials have been getting more expensive for months. Prices are being driven by exploding energy prices too, however, and sometimes unstable supply chains. This could result in a rise in wages, which in turn increases the risk of lastingly higher inflation. Christine Lagarde is obviously aware of the risk: it was not without reason that the president of the ECB frequently used the words "inflation risks" at the last press conference following the rate-setting meeting.
Chart: Inflation rates in the eurozone and USA
Source: Statista
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