Inflation has returned with a vengeance to the world.

After being very low by historical standards for several decades, the inflation rate is rising faster and more strongly than expected.

According to estimates, the average inflation rate in the world this year could reach 8 percent.

Inflation in August was 9.1 percent in the euro zone, 9.9 percent in the UK and 8.3 percent in the United States.

Hopes that the rate of inflation would quickly move back towards the 2 percent target of many central banks have been disappointed.

Inflation threatens to become a persistent phenomenon.

Gerald Braunberger

Editor.

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As was the case half a century ago, the price of important raw materials accelerated by war and other upheavals.

At that time, the Vietnam War sowed the seeds of inflation, the subsequent oil shocks after the Yom Kippur War and the Iranian revolution acted as a fire accelerator.

In our time, the pandemic and the Ukraine war have caused energy and other scarce raw materials and supplies to become significantly more expensive.

It is sometimes said that monetary policy is powerless against supply-induced inflation.

After all, what could higher interest rates do against the rise in the price of oil, gas and electricity?

This is an amazing fallacy.

Of course, monetary policy has no direct action against commodity prices - apart from the attempt to avoid a devaluation of the domestic currency and thus an additional increase in the price of commodity imports obtained in foreign currency.

Turkey shows how important the central bank is

However, the central bank can oppose the spread of commodity price increases to the entire basket used to calculate the inflation rate.

This proliferation occurs when aggregate demand exceeds aggregate supply.

Then, according to a quip by economists, too much money is chasing too few goods.

The task of a central bank committed to monetary stability is to contribute to balancing aggregate supply and demand by dampening demand.

If other institutions of monetary policy help to bring about this balance - so much the better.

The example of Turkey shows how important it is to the central bank: The inflation rate there is 80 percent after an erroneous monetary policy.

These connections have been known for a long time.

In 1973, after the first oil price shock, the Bundesbank wrote: “The striving of the oil-producing countries for a higher share of the national product and national income of the industrialized countries does not necessarily have to lead to a further acceleration in price increases.

Whether this happens depends very much in each country on whether it is easier or more difficult to pass on the higher prices for these – and other – important import goods, in other words, whether the international struggle for distribution is intensifying, which was triggered by the price-fixing of the oil producers was followed by an intensification of the domestic struggle for the distribution of the national income, which is only growing slightly in real terms.

The policy of the Bundesbank, in full agreement with the Federal Government, is aimed at limiting the monetary scope for passing on prices as much as possible.

There is no sign of a major conflict with other domestic economic policy goals;

it can be avoided all the more easily the more all those involved in the economic process - in accordance with the general line of economic policy - give priority to fighting inflation and act accordingly."

A wage-price spiral would be devastating

Many central banks - not only in Europe - initially underestimated the inflation of our time.

They are now reacting by raising interest rates.

Two observations are relevant: Monetary policy affects the price level with long and variable lags.

Fighting inflation will therefore take time.

In addition, monetary policy, at least in the euro zone, is still expansive despite the past increases in key interest rates: it is not the nominal interest rate that counts for many economic decisions, but the real interest rate adjusted for the inflation rate, which is still very low due to the high inflation rate.

How can other institutions support monetary policy?

Given that aggregate demand is overhanging, a stability-oriented fiscal policy must not now be expansive and characterized by a sharp increase in debt.

Instead, politicians must improve the supply conditions in the economy.

State control of prices, which does not combat inflation but only temporarily conceals it, should be avoided at all costs because it does not change the surplus in aggregate demand.

The faster inflation is fought, the lower the economic costs.

A recession is unavoidable, but its length and depth are not predetermined.

A spiral of rising wages and prices would also be devastating.

A spiral comparable to the past cannot currently be identified in Germany.

This may change if inflation continues to rise.

A lack of qualified workers, even in a recession, is a phenomenon of this magnitude not known from the past, which is likely to cause additional pressure on wages.

Inflation may have come to stay longer.