At first, the ECB completely got it wrong when it simply didn’t want to notice inflation in the Eurozone, which would continue to rise from autumn 2021 onwards. Although the numbers were very clear and the rate continued to rise month after month, it was just a phenomenon of short term that was no problem. At some point, the argument of the war in Ukraine as a price factor no longer counted. Now the ECB is apparently overcompensating and raising interest rates too long and too much – because they don’t want to be mocked a second time in the media. Expert Heiner Flassbeck also made some very interesting new comments about this.
Inflation on the way back – Lagarde wrong again?
First, let’s look at the following TradingView chart. Since 2019 we have witnessed the evolution of the key ECB interest rate (blue line). Since July 2022, the prime rate has increased from 0.00% to 4.00% last week (here the details). In orange we see the development of inflation in the Eurozone – it peaked above 10% in autumn 2022, only to come back to 6.1% so far. Furthermore, we see developments in producer prices in Eurozone manufacturing in turquoise. The annual growth rate of +43% last fall has dropped to +1.0% so far. German producer prices (yellow) also fell to +1.0%. And German import prices fell 7.0% in April (purple). According to these leading indicators, inflation should continue to fall significantly in the near future. But does the ECB want to raise interest rates even further – and is it up to shenanigans that are no longer necessary? That would be very possible!
Heiner Flassbeck spoke of the end of inflation three months ago
Economist Heiner Flassbeck said in March that inflation would go away in 3 months (here’s the video). And today, 3 months later, several leading indicators already show clear deflationary trends. So was Heiner Flassbeck right? In an interview with biallo (see video below), he recently said that the ECB’s target of bringing inflation back to 2% by 2025 was again completely wrong.
The ECB was dead wrong and doesn’t want to make a fool of itself a second time
And it’s also interesting to know why, according to Holger Flassbeck, the ECB is dead wrong with inflation that it says will take another two years to come down. According to Holger Flassbeck, futures price pressure is no more. Raising interest rates further is completely wrong. But: The ECB is embarrassed that it didn’t see inflation coming and therefore doesn’t want to take risks this time and fight inflation too hard. Inflation is falling much faster than he even expected, so the target will be reached very quickly.
Inflation: No pressure from salary increases
There was a one-off price increase, which is now over and will be reflected in low growth rates. According to Heiner Flassbeck, the dynamics of price development are clearly pointing down, even in negative territory. In this context, he also addresses leading indicators. According to him, the high wage increases are not yet being passed on, otherwise this would already be noticed if producer prices continued to rise. Salary increases are just a one-off effect.
“Politics is rushing blindly into recession”
Is the ECB exacerbating the recession by raising interest rates? Quite possibly, because it is clear that changes in the benchmark interest rate will only affect the real economy with a delay of several quarters, perhaps even a full year later. If the recession deepens now, will the ECB rate hikes in recent months exacerbate Europe’s economic woes in late 2023 and early 2024? This would be a possible scenario. Holger Flassbeck is very pessimistic about the economy. Not only the ECB with its interest rate hikes, but also the frugal Federal Finance Minister Lindner would have a negative effect. Industry indicators (-9.9% of new orders in April) are catastrophic.
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Heiner Flassbeck may be right with his scenario. It is only with the “delay trigger” that one can see in the real economy how negative strongly raised interest rates are. And Lagarde is currently extremely anxious to keep raising interest rates, saying there is still much to be done to fight inflation. We will only know in a few months if the recession in Europe will really be much more severe. And key ECB interest rates, which have now risen further, could have an increasingly aggravating effect.
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