Inflation: Only one thing helps fight price increases

P.Travel increases in a market economy when demand is greater than supply. There can be two reasons. Or the demand is growing faster than the supply. This happens when the central bank excessively increases the money supply, and when public and private households significantly increase their spending.

Either supply is falling faster than demand. This may be the result of production downtime. This is often the responsibility of “3 C” – wars, crises, catastrophes.

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If both happen at the same time – i.e. if demand rises and supply falls at the same time, this will become particularly critical. Then an avalanche of inflation may occur. Once set in motion, it is difficult to stop. Because it is accelerated too fast by its own dynamic forces.

This includes the often described wage cost spirals. They arise because everyone is trying to pass the rising prices as quickly and accurately as possible to others like a hot potato. Those who can pass the higher costs on to the customers.

The dreadful climate of inflation

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Likewise, those who are able to do so will demand a higher salary so that the wage retains its purchasing power when shopping. After a short while, everyone expects prices to continue to rise. And by trying to defend ourselves against inflation, you get exactly what you actually want to avoid: an inflationary climate develops that threatens economic welfare, social peace and political stability in equal measure.

The macroeconomic handbook describes the current reality in the euro area and Germany more or less accurately. At the same time, it reveals what helps most and most permanently in the fight against inflation: greater growth.

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Greater growth means broadening the offer. In this way, the gap between excess demand and insufficient supply can be bridged. Instead of complaining about empty shelves, shopping panic, queues, shortages and long delivery times, or selling scarce goods to the highest bidder, you need to increase production. Shortages are then not overcome by rising prices but by an increase in supply.

Now many will scream and argue that greater growth is neither economically possible, nor socially or ecologically desirable. Global supply chains are too severely disrupted, success stories are spread too unevenly and as a result the environment and climate are overburdened.

Free the supply, create the growth

Much of this is right. But nothing changes the fact that none of the enormous future challenges, no major risks to human existence, the consequences of the “3K”, and the genuinely severe distributional effects of inflation can be better managed with less growth than with greater growth.

Anything that triggers supply, which facilitates production, allows you to use production capacity 24 hours a day, ensures greater growth and thus helps to fight inflation. The fact that many things are not feasible in the short term should not be used as an excuse to at least start with them.

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This year, the euro in Germany is likely to lose almost seven percent of its purchasing power to inflation

Covid-19 Emergency Law showed what’s possible in terms of reducing bureaucracy, rules of exceptions, easier access, and “new job” if you want. They must become the measure of what extraordinary measures must also be possible against the backdrop of rising supply and rising prices.

Nevertheless, a more international division of labor is the order of the day in times of inflation. If global supply chains have become more risky for political reasons, the time of the European Economic Area is louder than ever. When, if not now, should the enormous economies of scale of the European dimension be exploited?

Inflation rises to 7.9%. in May

“Some Länder, such as Hesse, have even exceeded the eight percent mark,” says Dietmar Deffner of the WELT business editorial about the inflation rate. This set a new record in May. Nevertheless, experts believe that the summit may not have been reached yet.

From the military, to procurement, utilities and public infrastructure, to supply networks and suppliers: it has never been better than today to think about an offer from a European perspective in order to realize the significant potential for cost reduction.

Greater growth is a necessary precondition for generating the economic means by which to contain climate change – as far as possible – prevent environmental destruction, reduce the likelihood of 3Ks occurring, and the distributive effects of systemic threats – such as inflation – compensated for in order to be able to do so.

Create more value with less effort

A reminder to all critics of growth: economic growth has nothing to do with growth in kind. More growth does not mean more environmental damage or more resources wasted.

Economic growth means reducing waste, reducing costs and therefore prices, increasing productivity and creating more value with less effort. This broadens the scope of the ambitious ecological requirements and social distribution needs.

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Inflation is hitting food particularly hard this year

Anyone who genuinely deals with ecology, and not just green ideology, must demand more growth. More ideas, creativity and knowledge, faster and more effective innovation, new technologies, and more efficient technology are needed to generate more economic growth at lower ecological costs.

Only in this way will the supply become, will and remain large enough to provide inexpensive everyday goods to the ever-increasing demand of the world’s population, which will grow rapidly over a long period of time. Only in this way will ecological, demographic, social and structural changes not permanently endanger price stability (and thus local prosperity). More growth means less inflation.

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