How can a one-off price surge (e.g. because energy prices rise due to war) become permanently high inflation?
Through the so-called wage-price spiral.
Here's what happens in a wage-price spiral:
Initially, prices rise, for example, those of energy. That means nothing other than inflation. The loss of purchasing power as a result of inflation then leads to higher wage demands. This is understandable since employees do not want to live worse than before. In a second round, those wage increases cause new price increases (because labour costs increase the overall costs of companies), which in turn causes wage increases again.
A vicious circle is set in motion.
The current wage demand in the public sector is 10.5 per cent (as you can see above on the giant ad I came by in Berlin yesterday).
That sounds like a lot, but it is no more than a claim. As a rule, around 60 per cent of the original demand is reached in wage agreements.
Wage increases of six to seven per cent would, therefore, not compensate for the loss of purchasing power due to high inflation. It has also been shown that wage agreements in the recent past were moderate.
So a wage-price spiral does not seem to be getting off the ground. Happily.
As a result, inflation expectations in Germany are falling continuously and are expected to be between 5.0 and 7.4 per cent in 2023.