An inflation rate of 5.8 percent in the euro zone should finally end the dream that inflation will remain a merely temporary and not too serious phenomenon that monetary policy should ignore.
The narrative that has been circulating for a long time that inflation should not be taken seriously because it can actually only be explained by the rise in energy prices is no longer valid.
Yes, energy prices are rising particularly sharply, but meanwhile many other prices are also beginning to rise noticeably.
Inflation is not only there – it threatens to stay.
To make matters worse, there is a risk of high inflation combined with a noticeable decline in economic growth.
The economic consequences of the war in Eastern Europe will also weigh on the European Union.
A coincidence of high inflation and weak growth is referred to in economics as stagflation.
She was observed after the 1973 oil shock.
At that time, too, the devaluation of money spread from the energy sector to the entire economy.
From an analysis of the events of that time, important conclusions can be drawn for combating stagflation in our time.
The most effective way to combat inflation is to raise interest rates.
The problem with stagflation is that higher interest rates hurt an economy that is already not growing.
The result is rising unemployment.
Half a century ago, some countries let currency debasement run in hopes of protecting their economies.
The result was inflation rates of 23 percent in Japan, 19 percent in Italy and 16 percent in the UK.
In Germany, the Bundesbank led the economy into a brief recession, but the inflation rate did not rise above 7 percent.
In hindsight, the German economy came through the 1970s no worse than other countries' economies, but inflation was lower in Germany.
The European Central Bank should learn from this for the present: Inflation must be combated early and consistently, especially in uncertain times.