The forgotten evil of inflation

Inflation is bad, every economics student learns that in the first semesters, inflation is bad because then everyone does the wrong calculations. And because the small saver is the main sufferer.

It is one of the great, bitter lessons of the year 2022, which is now drawing to a close, that the damage caused by currency devaluation has not been described nearly enough. Inflation, there are indications - and this will become even more apparent the longer it lasts - is a social poison. It has a corrosive effect on a society because it damages cohesion in ways that can hardly be controlled.

It is known, especially from German history, that very high inflation, also known as hyperinflation, can destabilize entire political systems. What's also widely accepted is that a little bit of inflation -- maybe one, two, or three percent a year -- is a good lubricant for a vigorously growing economy.

However, the serious damage caused by even medium-high inflation has been lost sight of. This is understandable, after all, the last time that accelerated currency devaluation was established was almost two generations ago in Germany.

And back then, in the 1970s, the consequences were not so serious: Because at the time, productivity was still growing in addition to the working population, the cake to be distributed kept getting bigger. Distribution conflicts remained - Kluncker round or not - ultimately mild.

Today, on the other hand, the drastically reduced growth trend in productivity opens up little scope for distribution anyway - which does not bode well if consumer prices, as currently forecast by experts, should rise by a further five to ten percent in the coming year.

Because social coexistence almost inevitably turns into a back and forth: everyone is trying – perfectly legitimately, completely understandably – to get rid of the burden that inflation is putting on them. This pits workers and employers against each other, consumers and retailers, retailers and manufacturers, producers and suppliers, renters and landlords, taxpayers and tax authorities.

In the wage dispute in the metal and electrical industry, the Südwestmetall association and the IG Metall trade union have agreed on a pilot agreement. Accordingly, the employees receive an inflation compensation bonus of 3000 euros. Wages will increase from next June.

Source: WORLD

Sometimes it's about passing on price increases, sometimes less is delivered for the same price or poorer quality: Again and again everyone tries to avert the threatened loss of prosperity for themselves. More and more energy is migrating into distribution battles that are unproductive from a macroeconomic point of view. And the more the machine gets going - keyword wage-price spiral - the more difficult it becomes to stop it.

In their helplessness, governments often try cheap appeals for moderation. Or they come up with something seemingly clever, such as "concerted campaigns" or tax-free special payments - which in practice all too easily proves to be counterproductive taking sides, as has just happened in the German metal and electrical industry.

At the same time and afterwards, it is regularly politics that exacerbates social conflicts. The hunt for alleged "inflation profiteers", "price drivers" and "usurers" is still in its infancy in Germany, keyword "excess profit" tax. But German politicians have always been resourceful in identifying alleged culprits.

Almost exactly 100 years ago, at the beginning of the hyperinflation, the Chancellor himself wanted to ban "disgusting things" such as "public dance merrymaking", as WELT expert Frank Stocker reports in his eye-opening new book on "The Inflation of 1923".

The fourth way of bringing difficult conflicts to an apparent solution is already being taken: passing on the burden to future generations, that is, to those who cannot raise their voices. Largely independent of the actual need, politicians are pouring an unprecedented cornucopia on the citizens this year.

Public debt encourages inflation because governments can use it to reduce the burden of liabilities, an experience that has been known since ancient times.

But inflation also favors new debts, which the children and grandchildren of today's beneficiaries then have to shoulder. Which then drives another gap deeper into society: that between the generations.

"Everything on shares" is the daily stock exchange shot from the WELT business editorial team. Every morning from 5 a.m. with the financial journalists from WELT. For stock market experts and beginners. Subscribe to the podcast on Spotify, Apple Podcast, Amazon Music and Deezer. Or directly via RSS feed.