In unusual fashion, the ECB has criticized the economy for artificially boosting inflation. What irked consumers became a problem for monetary regulators: their powerlessness against a greed for profit.
The old lady took out a small bag of chicken tenders from the refrigerator again and again, looked at it, rummaged through the wallet, and put them back again. At 5.98 euros, the discount store, which likes to advertise itself as particularly cheap, also asks for an impressive price. Minis are half the price of what they were a few months ago. But the new prices are too high for pensioners. Instead, she walked down three rows and picked up a package of pasta.
how expensive groceries have become
Food remains the number one price driver in Germany, and it significantly reduces disposable income for many. While inflation in Germany eased in May from a year earlier to 6.1%, food prices continued to rise sharply – by almost 15%. In particular dairy (up 28 per cent), bread (up 19 per cent) and fish (up 19 per cent) became more expensive. Consumers also had to pay more for jams, chocolate and vegetables.
Initially, the aftermath of the corona crisis, the war against Ukraine and high energy prices were the triggers for high inflation. It is now becoming increasingly apparent that many companies are also artificially inflating prices. “Greedy inflation” is the name given to a phenomenon in which companies charge a final price far higher than justified by an increase in the cost of electricity, gas or primary products.
“Price increases go beyond mere cost pressures”
This “more” itself is now becoming a price driver and thus a challenge – so much so that even ECB President Christine Lagarde found clear words before the European Parliament’s Economic and Monetary Affairs Committee : “Most companies will “take advantage of the fact that higher costs are passed on entirely to customers,” Lagarde said. “Some of them have gone beyond mere cost pressures to raise prices.” “
Not only the ECB, but many other studies have documented the phenomenon of greedy inflation. For the food sector, credit insurer Allianz Trade examined the market and concluded: “There appears to be increasing evidence of profit-taking and a lack of competition,” said inflation expert Andy Jobst. This is especially true for manufacturers of dairy products, eggs and out-of-season fruits and vegetables.
Distract yourself from neglect?
According to the results of the North Rhine-Westphalia Consumer Advice Centre, random checks conducted by many consumer advocates showed that high price increases for certain products were “neither justified nor understandable”. A study by the Munich-based ifo Institute found that not only trade, but also the hotel, transport and construction industries know how to raise prices to unnecessary levels.
Indeed, inflation has been particularly high in the travel industry: even though kerosene prices have fallen sharply, the average airline fare on popular routes is twice as much today as it was a year ago. Tour operators are also hitting package tours hard – knowing full well that after years of coronavirus deprivation, the Germans are apparently willing to pay whatever the market demands.
For the ECB, the developments now underway are an argument to divert attention from its own failure to fight inflation. But they also present a major problem for monetary authorities: monetary policy has a hard time curbing greed. Neither raising interest rates nor tightening monetary policy will help curb irrational inflation.
Cartel authorities have yet to intervene
Also for this reason, ECB President Christine Lagarde went a step further: before the EU Parliament, she called on national competition authorities to tackle greedy inflation. “I would definitely think that’s absolutely appropriate,” she told lawmakers. But Lagarde need not get her hopes up: Last August, Andreas Mundt, chairman of the federal cartel office responsible for proper competition in Germany, reported a sharp rise in complaints about unfair increases in food prices. In individual cases will be checked. Nothing happened so far.
As a result, the ECB will raise rates again this week, even if the shift in rates now leaves its first stamp on weak economic developments. Many companies are hesitating as investments have become more expensive. Consumer sentiment is already in the basement. After Germany, the entire euro area is now in recession. Small but still strong enough that voices from the ECB’s Governing Council warning against too high interest rates are gaining momentum again.
stubborn inflation
But in recent weeks, Christine Lagarde has learned one thing: her reputation is tied to her success in the fight against inflation. “If you ask me if I’m happy with where we are,” she retorted recently tagesschau.deInterview and immediate response: “No, I’m not satisfied. I will only be satisfied when we reach our target of two percent inflation over the medium term.”
However, this may not happen for several months. Because the surge in inflation was very persistent and difficult to contain, despite initial success. So pensioners in supermarkets will continue to count, save and have to give something up. Not just her.