ECB chief Christine Lagarde will have looked twice at the inflation figures released today. Experts on her committee expected an inflation rate of 5.6 percent for February. Now it is necessary to point out an inflation rate of 5.8 percent, as announced by the Eurostat statistics office after an initial estimate. This is the highest value that the European monetary community has ever measured since the introduction of the euro in 1999. This means that consumer prices alone will increase by 0.9 percent between January and February.
The Federal Statistical Office also corrected its figures for Germany for February. Yesterday, March 1, 2022, it was announced that inflation was expected to average 5.1 percent compared to February. In addition, a higher annual inflation rate for 2022 than originally forecast is also expected. As Deutsche Bundesbank President Joachim Nagel said when presenting the annual report for 2021:
I expect that we will have to raise our forecast for the inflation rate in Germany again in 2022… meanwhile, the experts at the Bundesbank expect the inflation rate to hit five percent on average for the year.
Joaquin Nagel, March 02, 2022
What are the reasons for the increase in inflation?
Many economists have long been talking about rising inflation in Germany and Europe. If until now this has been mainly attributed to supply bottlenecks and lack of production capacity, as well as the global pandemic, there is now another difficulty. Because Russia is a major energy supplier, it can be assumed that even higher energy prices can be expected in the future as a result of Western-imposed sanctions. This variable has already increased in price by an estimated 22.5 percent in February.
As a result of the devaluation of the euro, it becomes attractive for people to place their savings in “safe deposit boxes”. Historically speaking, gold has often been offered as a “safe haven” in the past. But the “digital gold”, Bitcoin, has also seen its price rise in recent days. The price of Bitcoin has increased by fifteen percent in the last few days. Perhaps some are trying to protect themselves from the devaluation of their money. Especially for Russian citizens, this could be an attractive option after sanctions from governments and private companies.
Is now the time to switch gears?
Even though Central Bank President Lagarde spoke out against a rapid interest rate hike in the middle of last month, there is still a big question mark over the ECB’s next steps. At the time, he was still hoping for “stabilization at a high level.” She did not expect oil prices to continue rising at the rate they had seen in recent months. At the time, Lagarde compared interest rate policy to shifting gears in a car: “No one does it in fifth gear at full throttle, they just take their foot off the accelerator and downshift step by step. That is exactly what we are doing right now. And as soon as the pace is right and the situation allows, we’ll take the corner.”
Well, energy prices have obviously increased at a similarly dynamic rate as before. So is it time to switch gears, Christine Lagarde?
What is an inflation rate?
The inflation rate is determined using the harmonized index of consumption (IPCA). This measures “how the prices of goods and services purchased by households change over time.” Different goods with different weights are entered in the calculation. Data is reported monthly and annually. For the year 2022, the following weightings have been obtained so far:
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