German finance minister plays down rapid rise in inflation

German finance minister Olaf Scholz has played down the surge in inflation in Germany in May, calling it a “temporary phenomenon”.

The annual pace of price growth in Germany rose to 2.4 per cent last month, its highest rate in more than two years; the country’s central bank forecasts that it could hit 4 per cent later this year.

Scholz blamed the rise on “adjustment effects”, singling out the recovery from the coronavirus pandemic in certain sectors of the economy, which has disrupted supply chains and pushed up demand for everything from raw materials to semiconductors.

“That’s a situation which also affects prices,” he said.

Scholz also blamed the lifting of virus restrictions. “Shops have been closed for a long time and that has had a consequence for prices,” he told journalists. “When they go up, it’s not so surprising.”

Inflation has begun to rise in many countries as leading advanced economies recover from the pandemic’s impact. Central banks are coming under growing pressure to consider scaling back the vast monetary stimulus they launched last year in response to the crisis.

Eurozone inflation rose to 2 per cent in May, up from 1.6 per cent in April. It was the first time the rate had surpassed the European Central Bank’s target of close to, but below, 2 per cent for more than two years.

However, several ECB policymakers, including its president Christine Lagarde, have said the surge is only a temporary phenomenon, driven by one-off effects, and predict it will fade next year.

Most economists think a sustained period of above-target inflation is unlikely in the eurozone because millions of people who lost their jobs, were put on furlough or left the workforce during the pandemic have yet to become economically active again. The ECB estimated that annual wage growth in the eurozone stood at just 1.4 per cent in the first quarter.

However, some Germans fear that much higher inflation is possible.

In a recent open letter, politicians and businesspeople including former Bavarian prime minister Edmund Stoiber, former German finance minister Peer Steinbrück and Deutsche Bank chair Paul Achleitner warned that excessive inflation could cause “massive social upheavals and distributional disparities”.

Scholz also cited the effect of the recent rise in value added tax back to pre-pandemic levels as a driver of the inflation trend. Berlin cut VAT from 19 to 16 per cent during the early phase of the pandemic as part of a fiscal stimulus, but the reduction expired at the end of last year.

When VAT returned to its former level, “that leads automatically to a purely mathematical inflation effect, which one shouldn’t overstate”, Scholz said.

The gradual lifting of lockdown and the reopening of hotels and restaurants meant that “prices are a bit higher than they were last year — that also has an effect”.

Scholz said globalisation had created a situation in which there was a surplus of cheap goods and services in most big western economies. “This trend has not been broken,” he said, implying this would help keep inflation low.

However, he added, it might become a problem in the years to come. “Growing prosperity in the world leads to demand in the former supply markets, which will ultimately have an effect,” Scholz said. “But that’s a phenomenon that we’ll have to deal with more intensively in 10 or 15 years than today.”

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