Massive price increases and currency devaluation here and there. But the inflation in Germany cannot be compared with that in the USA. The rate hikes by the central banks should therefore be assessed differently. Things could get tight for the economy in this country.

10 percent in Germany, 8.2 percent in the USA – inflation measured by the consumer price index has increased dramatically in the last year. The European Central Bank (ECB) and the US Federal Reserve are countering this and raising interest rates. Money becomes more expensive, consumption and investments decrease. Supply and demand for goods find a new equilibrium. At least that is the causal chain in the action-guiding model of monetary theory. But that is where the similarities between Germany or the euro area and the USA end. A detailed look at the inflation figures reveals serious differences.

In Germany, most of the price increases are due to the fact that imports have become more expensive. The prices of energy and raw materials have multiplied in some cases. In addition, the external value of the euro has fallen. Different in the US. The strong US dollar makes imports cheaper, there is no shortage of energy – on the contrary, the export of fracking gas to Germany at top prices represents a new source of income. Instead, the price increases in the USA are largely due to higher wage costs.

In the course of the Corona crisis, the state distributed various direct aid payments to citizens, which led to increased demand that could not be met due to disrupted supply chains. Accordingly, inflation in the USA rose significantly in 2021 long before the start of the Ukraine war.

If you compare the financial situation of both countries today, the increase in prosperity of the population in the USA compared to Germany was considerable last year. Salaries in the US rose twice as fast and the dollar gained over 20 percent against the euro. Looking at the companies, the same picture emerges. According to the latest OECD analysis, companies’ net returns on sales in the USA in 2021 will be more than twice as high as in Germany.

Looking ahead, this means that the Fed’s actions will solve, and to a large extent already have solved, a luxury problem. On a monthly basis, inflation in the US did not increase significantly in July and August. The September figures were released this Thursday and came in 0.4 percent above analysts’ expectations. Despite this setback, the high 8.2 percent of a 12-month analysis is no longer representative of the current trend. In fact, the Fed has already got the problem under control. Producer price inflation in the USA also confirms this picture. The Fed will certainly carry out the expected interest rate hike this year, but it can slow down in communication and probably no more interest rate hikes will be necessary next year.

In Germany and the euro area we have the opposite picture. On a monthly basis, inflation has gained momentum over the past three months, both in terms of consumer price inflation and producer price inflation. Since inflation is caused by more and more money flowing out of the country for expensive energy, the ECB rightly doubts the effectiveness of its interest rate policy. The governments are thwarting the ECB’s money shortage by skyrocketing national debt through aid payments and price caps.

Rather, the problem in Germany is our economic policy. The industry of the fourth largest economy in the world to switch off its own energy supply was already unrealistic and internationally unique under Chancellor Angela Merkel. In addition, Germany’s business model is based on importing semi-finished products, finishing them with very well trained specialists and exporting them again. A business model that cannot function in the long term without a strong currency.

The euro will survive inflation, but if our economic policy continues like this, we won’t recognize the German economy in a few years. The general public should ask themselves whether they really want to continue on this course of the government and the EU. It would be urgently necessary to examine all nationally available energy resources without ideology.

After all – for wealthy investors, the current situation is not a problem, because the international capital market offers solutions. Everyone else, on the other hand, could look into the tube. And not only as investors, but also as citizens.

dr As an independent financial mathematician, Andreas Beck evaluates the quality of asset management. Among other things, he has been testing the portfolios of the leading private banks in Germany together with n-tv for over ten years. His latest book “Successful Scientific Investing” can be downloaded free of charge from www.globalportfolio-one.de.

(This article was first published on Saturday, October 15, 2022.)