Stable inflation: no all-clear for the economy”

Stable inflation: no all-clear for the economy”

While the recently reported inflation rate of 2.2 percent for April suggests stability, it is important to emphasize that this does not mean the end of inflation. This value will be imprinted in the memory of the euro as a loss of German purchasing power. Since the introduction of the common currency in 1999, Germans have lost almost 40 percent of their purchasing power.

In this decade, almost all major economies have experienced sustained inflation, although in some places it is even significantly more aggressive than in Germany. However, the Federal Republic is showing a negative impact due to the combination of a continuous loss of purchasing power and weak real growth. Estimates suggest that Germany's gross domestic product will grow only minimally in 2024, net of inflation.

The recent stabilization of inflation just above the European Central Bank's target of two percent should not be taken as an all-clear. Although it may now be easier for the ECB to cut interest rates, it is crucial to recognize that cheaper money alone will not stimulate economic growth. The possibility of “stagflation” – a combination of stagnation and rising costs of living – remains unless new dynamics are introduced that encompass both the economy and public life.

To drive growth, Germany must focus on increasing productivity, as an increasing number of well-trained workers is not enough. In a knowledge economy like Germany, increasing efficiency is the key to generating growth without inflation eating up the gains in prosperity. It is becoming clear that the painful decline in the value of the euro of almost 40 percent, particularly in recent years, is an alarming reminder.