A purple, potbellied monster with missing teeth and a red Mohawk tossing around banknotes. That's what the European Central Bank imagines inflation looks like – at least according to an educational film for schoolchildren on the ECB website.
For a long time, the monster seemed to have disappeared. Now it seems to be slowly coming out of hibernation – at least in Germany.
Prices rose in December by 1.7 percent in Germany, the fastest rate in three years. It’s welcome news for more conservative economists here who have been clamoring for an end to the relaxed monetary policy of the European Central Bank.
"In my opinion, what is important is a signal that the ECB does not plan to allow inflation to rise above about 2 percent," Clemens Fuest, head of the Munich-based Ifo Institute for Economic Research, said in an interview. That means dialing back the massive bond-buying program the ECB has been running for nearly two years.
And yet, that kind of signal is not to be expected at this time. The central banking “hawks” who advocate a tighter monetary policy, led by Germany, are not in the majority in the ECB governing council that sets interest rates. The council is dominated by proponents of a relaxed monetary policy, the doves.
German inflation is significantly higher than in other members of the 19-nation euro zone.
The doves to have a point: German inflation is significantly higher than in other members of the 19-nation euro zone. In Italy and Greece, for example, inflation was just above zero in December. For the euro zone as a whole, consumer prices rose 1.1 percent.
Neither side can deny that conditions have become reversed in the euro zone. In the first decade after the euro was introduced, prices in peripheral countries like Greece and Spain rose at a significantly higher rate than in Germany. Now, there is growing movement in the opposite direction.
"We have seen this in real estate prices for a long time, and now it seems to be spreading," said Mr. Fuest. And that's a good thing, he added. From his point of view, it is "desirable, to a certain extent," for inflation in Germany to be higher than the euro-zone average.
One reason the crisis arose in the euro zone in the first place is that wages and prices increased far too quickly in countries like Spain and Greece and too slowly in Germany. These differences contributed to the major imbalances in the monetary union.
Countries like Greece imported much more than they exported, accumulating debt with other countries as a result. Such imbalances can normally be partially offset through the exchange rate. But because of the common currency, the euro countries have to offset those differences in other ways, such as through slower increases in wages and prices in the peripheral countries than in Germany.
That’s exactly the kind of development Commerzbank chief economist Jörg Krämer now expects to see over the coming years. Wages and prices are forecast to increase at a higher rate in Germany, especially given that the unemployment rate is lower in Germany than in other euro countries, which increases the negotiating power of employees and the prospect of wage increases.
The problem is that for Germans, inflation is truly a monster that needs to be tamed. Nowhere in the euro zone is the aversion to higher prices as strong as in Germany, which is why the Bundesbank is concerned about the latest figures.
In its December prognosis, it anticipates inflation of 1.4 percent for 2017 in the largest economy in the euro zone. But it could even be significantly higher than that, because the German central bankers based their calculations on an oil price of $49 per barrel of Brent crude. But if the oil price is at $55, as it is now, inflation could rise in the direction of 1.9 percent.
That would place inflation, at least in Germany, exactly back in the range of "below but close to 2 percent" that is targeted by the European Central Bank. In theory, since the euro zone wants to see consumer prices for the entire euro zone around that mark, a rise above 2 percent in Germany shouldn’t be a problem.
That might be a view of many “doves,” but it’s virtually a no-go in Germany. Instead, higher prices here are only likely to increase pressure on the ECB to move away from its relaxed monetary policy.
"The zero interest policy is devastating for German savers," Bavarian Finance Minister Markus Söder, a member of the conservative Christian Social Union (CSU), said recently, adding that the ECB should raise interest rates as quickly as possible.
He isn’t likely to get his way with the ECB. His hopes rest primarily on the two German members of the central bank’s 25-member governing council: Bundesbank President Jens Weidmann and Sabine Lautenschläger, who are both viewed as so-called hawks. As ever, their few allies come from the other mostly northern countries in the European Union that suffered less during the euro zone debt crisis. They include Luxembourger Yves Mersch, a member of the ECB’s board in Frankfurt, as well as Dutch central banker Klaas Knot and the heads of the two Baltic central banks, Ardo Hansson from Estonia and Ilmārs Rimšēvičs from Latvia.
That’s hardly enough of a voting bloc to change policy. In December, the ECB council decided by a large majority to extend the central bank's bond purchases until the end of this year. At the same time, however, it lowered its monthly purchasing volume to €60 billion starting in April.
Not everyone in Germany is clamoring for a change just yet. Marcel Fratzscher, the head of the German Institute for Economic Research (DIW), sees no reason to panic.
"No one should worry that the inflation trend in Germany could be too high," said Mr. Fratzscher, who supports the ECB’s current policy, which places him more on the side of the doves.
Whether the majorities in the council begin to shift, only time will tell. But one thing is clear: The higher inflation goes, the stronger the hawks' arguments become.
Jan Mallien covers monetary policy for Handelsblatt out of Frankfurt. To contact the author: [email protected]