Inflation rises sharply

PUBLISHED ON Monday, 16 August 2021

In May, the inflation rate was around 2.5%, as measured by the change in Consumer Price Index (CPI) going back to the same month in the previous year. Compared to April 2021, consumer prices were up by 0.5%. Experts are in the middle of a controversial debate as to what the causes are and what resulting effects this could have for the financial markets. Many of them are certain that the current high inflation is a passing phenomenon. European central banks also attribute the sharp price increases to a string of exceptional factors. Why? Coronavirus! Most banking experts and asset managers share in this assessment.

Not to mention that energy prices rose sharply in May. When calculating inflation, a given price is generally compared with that from the same month a year prior. And in 2020, oil prices took a major nosedive due to coronavirus. This was because there wasn’t much going on in the business world. Many companies manufactured significantly lower product volumes, demanding with this significantly lower raw material volumes for production input. That, among other things, pushed the price of oil down. Because if demand on the market is smaller than the supply, the price of the supplied product that hardly anyone wants drops.

In the meantime, machines around the world have started chugging away again, production and construction have returned, hustle and bustle and travel are back – the price of oil is rising. The cost of a barrel of crude oil is currently a little over 60 U.S. dollars – that’s 250% more than in April 2020! In January 2020 (before the pandemic), by the way, it was also around 60 U.S. dollars.

So, because the difference is so stark but also unique because of the coronavirus situation, most experts don’t believe that this trend will continue for much longer. Many expect the price to have a marked increase, at least this year, but possibly also into 2022.

In Germany, what’s more is that the increase in value-added tax from 16% to the pre-corona level of 19% is likely to give a short-term boost to inflation.

Such unique price changes aren’t *actually* inflation at all, though, as inflation is the process of recurring price increases. We have summed up for you why that is and what inflation actually is here (link to inflation text). That’s why, as an investor, you should never overestimate the value of current cost-push discussions, even though they can happen through the course of the year due to unfulfilled supply bottlenecks and ever-worsening pent up demand. Even if cost-push could drive inflation in Germany toward 3% in the second half of the year, it should go back to normal next year.

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