The German finance minister, Olaf Scholz, downplayed the inflation growth in Germany in May, calling it a “temporary phenomenon.”
The annual rate 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 predicts it could hit 4 percent later this year.
Scholz blamed the growing “regulatory effects,” choosing the recovery from the coronavirus pandemic on certain sectors of the economy, which has disrupted supply chains and increased demand for everything from raw materials to semiconductors.
“It’s a situation that also affects prices,” he said.
Scholz also accused the lifting of virus restrictions. “The shops have been closed for a long time and that has had a consequence for prices,” he told reporters. “When they come up, it’s not that amazing.”
Inflation has begun to rise in several countries as major advanced economies recover from the impact of the pandemic. Central banks are under increasing pressure to consider reducing the vast monetary stimulus they launched last year in response to the crisis.
Eurozone inflation rose to 2 percent in May, up 1.6 percent from April. It was the first time the rate exceeded the European Central Bank’s target of close, but below, 2 percent for more than two years.
However, several ECB policymakers, including its president Christine Lagarde, have said the rise is only a temporary phenomenon, driven by one-off effects, and predict that it will disappear next year.
Most economists think that a sustained period of inflation above target is unlikely in the eurozone because millions of people who have lost their jobs, have been laid off or have left the workforce during the pandemics are yet to become economically active again. The ECB estimated that annual wage growth in the euro area would be at 1.4% in the first quarter alone.
However, some Germans fear that much higher inflation is possible.
In a recent open letter, politicians and businessmen including former Bavarian Prime Minister Edmund Stoiber, former German Finance Minister Peer Steinbrück and Deutsche Bank President Paul Achleitner warned that excessive inflation could cause “massive social upheavals it’s distributive disparities. “
Scholz also cited the effect of recent value added tax growth back to pre-pandemic levels as a driver of the inflation trend. Berlin has cut VAT from 19 to 16 percent during the first phase of the pandemic as part of the fiscal stimulus, but the reduction expired at the end of last year.
When VAT returned to its former level, “that automatically leads to a purely mathematical effect of inflation, which should not be exaggerated,” Scholz said.
The gradual lifting of the lock and the reopening of hotels and restaurants has meant that “prices are a little higher than they were last year – which also has an effect.”
Scholz said globalization has created a situation where there was a surplus of goods and services at bargain prices in most major Western economies. “This trend has not been broken,” he said, implying this would help keep inflation low.
However, he added, it could become a problem in the years to come. “Growing prosperity in the world leads to demand in the old supply markets, which will ultimately have an effect,” Scholz said. “But it’s a phenomenon we’ll have to deal with more intensely in 10 or 15 years than today.”