More and more experts are expressing pessimism about the continuation of inflation in the euro zone. A look at history shows why this is so. One thing is clear: there has never been a painless way out of the inflation trap. But there is also hope.
As was announced yesterday, the inflation rate in the USA fell for the first time in three months: at 8.5 percent, and thus a drop of 0.6 percentage points compared to the previous month, the inflation rate weakened more than most experts had forecast.
Elon Musk should also feel confirmed. A week ago, he made a bold prediction at Tesla’s annual general meeting: the costs of raw materials and components are likely to fall over the next six months.
“The trend is down, suggesting we have passed the peak of inflation.”
Fed Chair Jerome Powell came to a similarly cautious assessment at the most recent US Federal Reserve meeting at the end of July. He pointed out that the inflation rate would have to fall significantly for several months in a row before the central bank would change its monetary policy course. Powell stressed that he wants to bring inflation back to 2%: “In the months ahead, we will look for compelling evidence of declining inflation consistent with inflation returning to 2%.”
Franziska von Haaren is a member of the editor-in-chief at ThePioneer. She has been there for 2 years, previously as the editorial director of the Steingarts Morning Briefing. In this function, the journalist played a key role in the further development of the Steingarts Morning Briefing, which is now one of the most widely used journalistic products in Germany.
In its baseline scenario, the US investment bank Goldman Sachs even assumes that inflation in the euro area will rise to 10.3 percent in September – a political issue for the government as well.
On the other hand, the euro area also imports inflation through expensive Russian gas – a dependency that the USA is not confronted with on this scale.
According to this, periods of inflation in the United States have lasted an average of 30 months since 1956. A recession occurred 18 months after the onset, and the peak of each period was only reached after 19 months.
• Between May 1978 and April 1982, 22-month inflation (March 1980) peaked at 13.5 percent—the highest rate on record. The recession began after 20 months in January 1980. Only an aggressive increase in the key interest rate, known as the “Volcker shock”, named after the former US Federal Reserve Banker, was able to stop the inflationary phase after a total of 47 months.
• The most recently completed inflation cycle from December 2006 to November 2008 peaked at 5.6 percent after 19 months. The recession set in after 12 months in December 2007. The entire phase lasted 23 months.
Measured by an inflation rate of over two percent, the US is in the 18th month of the current inflation cycle and is therefore only a little over halfway based on the study’s historical data.
Conclusion: The past teaches that there is no painless way out of the inflation trap. The short way out of the misery means: several interest rate hikes and recession. The long way means: stagnation and further inflation. So the keyword for our fellow human beings for the next ten years is exertion, not dropping out. Or to paraphrase Winston Churchill: “The trick is to get up one more time than you are knocked over.”
