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An Introduction to Inflation

Inflation is an issue that was completely off the radar for a long time. After the global financial crisis of 2007/2008 and the fight against its effects in the following years, there was a long-lasting period of low interest rates. Interest rates were reduced further and further and, in some cases, slipped into negative figures.

Corona Crisis in 2020

When the Corona crisis struck in 2020, gigantic government stimulus programmes were launched to stabilise the economies with huge amounts of money. Due to ever new waves of virus variants and despite the worldwide vaccination campaigns, Covid-19 keeps us on tenterhooks until today. The various Corona responses have disrupted global supply chains and there is still a shortage of raw materials and inputs in certain sectors. The shortage is permanently matched by an inflated money supply. In addition, due to a labour shortage in many sectors, wages are rising sharply and there are signs that the wage-price spiral is beginning an upward turn. All these points lead to the fact that we have observed strongly rising prices for raw materials, energy, intermediate products, and food since 2021. The inflation rate in Germany in January 2022 was 4.9 %, and in the US even 7.5 % compared to the previous year.

Definition of Inflation and what does it lead to?

How to invest in the face of Inflation?

War in Ukraine

In view of the Russia-Ukraine war, Deutsche Bank CEO Christian Sewing now expects the inflation rate to receive a further boost, especially in prices for raw materials and energy. Sewing expects an inflation rate for Germany of around 5 % for the whole year. The extent to which inflation will continue to rise will depend heavily on the further development of the war in Ukraine. A few days ago, the Institute of the German Economy (IW) published a forecast that annual inflation could even rise to 6.1 % for 2022 according to various model simulations.

Inflation in the US

In the US, inflation is being driven by four phenomena that have occurred pretty much simultaneously: the commodity price hike, global supply bottlenecks, ultra-expansive monetary policy, and government stimulus measures. Most importantly, the rapidly recovering global economy has had a negative impact on commodity prices. Following the pandemic-related slump in the spring of 2020, when the price of crude oil plummeted to below USD 30, the subsequent economic recovery catapulted the price of oil to over USD 100 per barrel. And a high and rising oil price has inflationary effects on almost all sectors of the economy and drives inflation particularly strongly. After the outbreak of the Russia-Ukraine war, a shortage of oil production in Russia or a turning-off of the oil and gas taps could prove to be an additional inflation driver. In mid-June 2022, the US Federal Reserve raised the interest rate by 0.75 %, the highest increase in twenty years, to counter inflationary pressures. Further rather moderate interest rate steps by the Federal Reserve are expected for the rest of 2022. In the eurozone, the ECB is expected to raise interest rates slightly by 0.25 % in July.

In the following articles we will go into more detail on inflation and its definition, look at inflation and its effects in Germany in the past, and discuss the current inflation target and the ECB’s inflation-fighting strategy. Last but not least, we will consider how the topic of inflation can be taken into account when investing money and what measures can be taken to avoid a creeping devaluation of assets.

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