ZEW Economist Friedrich Heinemann on the Inflation Rate in August 2021

The Federal Statistical Office published its preliminary results on the development of the German inflation rate in August 2021. According to the calculations, the inflation rate measured by the German consumer price index has risen to 3.9 per cent, a slight increase compared to 3.8 per cent reported in the previous month. Professor Friedrich Heinemann, head of the Research Department “Corporate Taxation and Public Finance” at ZEW Mannheim, comments on this matter.

“Inflationary pressure will remain very high in Germany at least until the end of the year. Only in January 2022 will the VAT increase at the beginning of last year disappear from the statistics and bring temporary relief. But even after that, a return to moderate inflation rates below two per cent is by no means certain. Inflation processes are driven by self-fulfilling expectations. If confidence in stable money fades, this leads to inflation surcharges in wage agreements, which further fuels price increases. The ECB now faces difficult months ahead. On the one hand, the highly indebted countries in southern Europe are fully dependent on further bond purchases and zero interest rates to remain solvent. On the other hand, the eurozone urgently needs strong signals from the Governing Council that it takes inflation risks seriously and will keep its promise of ensuring stability. It must no longer be the central message in the ECB Executive Board’s communication that it will simply continue with its extremely expansive monetary policy.”