Inflation Expectations 2022: What’s In Store?

Inflation Expectations 2022: What’s In Store?

For a long time, inflation was not talked about at all, but in 2022, inflation expectations have literally exploded. Everyone is talking about price increases for products such as fuel, energy, sunflower oil and flour, and you, too, will feel in your wallet that things are a bit tight right now.

What Was The Original Inflation Expectation For 2022?

To answer the question, let’s take a brief look back:

  • In 2017 to 2019, the average inflation rate in Germany was 1.4% to 1.8% (euro zone: 1.2% to 1.8%), i.e. in the green zone. The European Central Bank sees itself as the guardian of price stability and is very satisfied with values of up to 2%.
  • 2020: In the first Corona year, inflation was 0.5% in Germany and 0.3% in the euro zone, i.e. very low.
  • In 2021, the values were 3.1% for Germany and 2.9% for the euro zone. However, economists saw no cause for alarm in this, because they had priced a trend of compensation into their inflation expectations, which was expected to continue in a similar form in 2022.
  • The previous highest level of inflation recorded for decades was set in Germany in May 2022 at 7.9% (euro zone: 8.1%). This far exceeded initial inflation expectations for 2022. Even though the June figure is 7.6%, this does not yet mean any real easing.

How Does Inflation Arise?

Inflation means price increases. In Germany, it is calculated on the basis of a representative basket of goods. The prices of the products in the basket are determined monthly and compared with the same month of the previous year. Rents and energy prices account for around one third of the basket, food for around one tenth and fuel for “only” 3.5%. In principle, the ECB even aims for a low inflation rate. In theory, an inflation expectation of around 2% creates incentives for companies to invest. This stimulates consumption. Price stability or even falling prices (deflation) induce consumers to postpone purchases (after all, it will get cheaper) and to save. The green zone is exited when there is a dysbalance of supply and demand for various reasons, for example in the event of an extreme shortage.

What Drives Further Inflation Expectations For 2022?

There are several parameters that have an impact on further inflation expectations for 2022. Some more strongly, some less strongly.

 

  • After the removal of the Corona restrictions, the propensity to consume has increased extremely. The trend from 2021 is continuing.
  • During Corona, many companies again produced more domestically, at higher labor costs. The trend toward de-globalization could intensify in view of the Ukraine crisis.
  • Currently, many rounds of wage negotiations are underway with very high demands from the unions (due to increased prices). This could set in motion a wage-price spiral, because higher labor costs would cause prices to rise again. However, leading economists do not yet see this danger.
  • The Ukraine crisis has led to a shortage of energy sources and global grain supplies. There is no relief in sight.
  • However, the Ukraine crisis is also making a positive contribution to inflation expectations in 2022. It is weighing on the economy and leading to lower demand and thus production of other consumer goods, which should fall in price.
  • Politically, countermeasures are being taken with the relief package (key words: fuel rebate, 9-euro ticket).
  • The ECB has also announced changes in its interest rate policy.

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What Inflation Expectations Remain For The Rest Of 2022?

For 2022, the ECB formulates an inflation expectation of 5.1% for the euro zone, for 2023 it is to be 2.1% and for 2024 the value is 1.9%. Similar values are expected in Germany. The ECB’s efforts to date with its zero or low interest rate policy have tended to be aimed at counteracting so-called “disinflationary dynamics”. The ultra-loose monetary policy served to keep inflation above the zero percent level. Now is seen as the time for “normal” monetary policy. In theory, rising key interest rates should make loans more expensive, savings more attractive and thus put the brakes on prices.

What Does The High Inflation Expectation 2022 Mean For You?

If your own wage increases are eaten up by inflation, then you tend to be able to afford less. But if you don’t have a car, for example, some extreme inflation cases will fall away for you. As a general rule, saving goes on prices. And saving energy in particular should not only be the order of the day for reasons of inflation expectations in 2022, but also for reasons of climate expectations in 2050. However, high inflation also means that money that you have parked somewhere with low or no interest will lose value.

What Protection Is There Against High Inflation Expectations in 2022?

Investments with a corresponding return should be a remedy, and there are currently almost only shares. However, if you look at the prices every day, you will need strong nerves to cope with the fluctuations. In this case you have to think long term. And in case of need, there is always gold, which will never lose its intrinsic value.

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