DGermany’s inflation rate rose to 3.8% in July, which is not as unexpected to many experts as it is to the general public. Since the debate on inflation in Germany tends to be more hysterical than in other countries, it is worth investigating whether inflation is only a temporary concern. Because it is indisputable that the current inflation rate is driven by temporary effects such as the value-added tax cut last year, and it has now expired. But the question of whether other long-term forces may also have an impact on inflation is reasonable.
In any case, economic policy—monetary policy and financial policy and other branches of economic policy—is currently in danger of setting priorities incorrectly because it underestimates the dynamics of change. Before the pandemic, the old industrialized countries were in an environment of low economic growth, low inflation and low interest rates. It does not need to be maintained this way. On the contrary, even without monetary and financial stimulus measures, inflationary pressures have moderately increased, and the economic environment has sufficient reasons for improvement. The task of a good economic policy is to create the right conditions to take advantage of the growth potential while controlling inflation.
The main reasons for the triad of low growth, low inflation and low interest rates are the secular effects of population development and the transformation of a capital-intensive industrial society to a service-oriented knowledge society. Until now, it has been accompanied by low productivity growth. Low inflation is favored by the global division of labor This allows industrialized countries to obtain cheap consumer goods from emerging and developing countries that produce low wages.
Many processes in the state system are running poorly
However, in the face of the digital revolution covering all areas of life, due to demographic reasons, growing doubts about globalization, and rethinking of previous lifestyles and economic models caused by pandemics and climate change, wage pressures are also increasing for a long time. Important parameters are changing. The pandemic is prompting private companies to re-examine their business models. It is tempting to advance the company’s digitization as quickly and comprehensively as possible. This should lead to a significant increase in productivity in the coming years.
The strong demand for its products and services in turn prompted technology companies to develop further innovative solutions. Companies will not be able to reject this modern push: those who do not participate are more likely to be driven out of the market sooner or later.
The pandemic has also shown considerable government deficits, especially in Germany which caused people’s surprises. For example, the equipment in schools and health departments is extremely bad; in addition, many processes in the national system are not functioning well. Even before Corona, chronic inadequacy of police, justice, and military equipment was a problem. In the past, many politicians had no reason to make up for obvious dissatisfaction because they were more willing to use money for social and political transfers. Given that government misconduct has received widespread attention in public, politicians should now also have the motivation to do the most urgent tasks first.
An ambitious climate policy will put considerable pressure on the economy on the one hand, but will also initiate a wide range of private and public investment projects. Coupled with a significant increase in productivity, this is likely to lead to higher economic growth associated with a small increase in interest rates. This situation is threatened by doubts about the division of labor in the global economy, which is not only detrimental to economic growth, but may also lead to higher inflation. Future-oriented economic policies will have to face these challenges instead of thinking that low interest rates and high government spending are eternally correct strategies.
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