German Finance Minister Olaf Scholz played down the spike in inflation in Germany in May, calling it a “temporary phenomenon”.
The annual rate of price growth in Germany rose to 2.4% last month, its highest rate in more than two years; the country’s central bank predicts it could reach 4 percent later this year.
Scholz blamed the rise on ‘adjustment effects’, targeting the recovery from the coronavirus pandemic in certain sectors of the economy, which disrupted supply chains and increased demand for everything from raw materials to semi -conductors.
“It is a situation which also affects prices,” he said.
Scholz also blamed the lifting of virus restrictions. “The stores have been closed for a long time and this has an impact on the prices,” he told reporters. “When they go up, it’s not that surprising.”
Inflation has started to rise in many countries as major advanced economies recover from the impact of the pandemic. Central banks are under increasing pressure to consider cutting back the sweeping monetary stimulus they launched last year in response to the crisis.
Eurozone inflation hit 2 percent in May, down from 1.6 percent in April. It was the first time the rate had exceeded the European Central Bank’s target, close to but below 2% in 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 that it will fade away next year.
Most economists believe that a prolonged period of above-target inflation is unlikely in the euro area, as millions of people who have lost their jobs, been placed on leave or left the labor market during the pandemic have not yet become economically active again. The ECB estimated that annual wage growth in the euro area was only 1.4 percent in the first quarter.
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 Chairman Paul Achleitner warned that excessive inflation could cause “massive social upheavals and disparities in distribution”.
Scholz also cited the effect of the recent increase in value added tax to pre-pandemic levels as driving the inflation trend. Berlin cut VAT from 19% to 16% in the first phase of the pandemic as part of a fiscal stimulus, but the reduction expired late last year.
When the VAT has returned to its previous level, “this automatically results in a purely mathematical inflation effect, which should not be overestimated,” said Scholz.
The gradual lifting of the lockdown and the reopening of hotels and restaurants mean that “prices are a bit higher than they were last year – that is also having an effect.”
Scholz said globalization has created a situation in which there is a surplus of cheap goods and services in most of the major Western economies. “This trend has not been interrupted,” he said, hinting that this would help keep inflation low.
However, he added, this could become a problem in the years to come. “Growing prosperity around the world is driving demand in old supply markets, which will ultimately have an effect,” said Scholz. “But it is a phenomenon that we will have to face more intensely in 10 or 15 years than today.