Stagnation threatens: Economists worry about inflation offset claims

Looming stagflation: Companies pay compensation for inflation – why economists worry

In order to compensate for the rise in consumer prices, the boss of the DGB, Reiner Hoffmann, is demanding higher wages. Some companies already pay an inflation allowance. But economists are worried about this development. They fear stagflation like in the 1970s during the oil shocks.

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Employees and employers suffer from rising prices. The purchasing power of consumers drops drastically. In order to offset inflation – currently at 7.3% in April – DGB boss Reiner Hoffmann is now demanding significant pay rises. He explained to the “Rheinische Post”: “The compensation for inflation, the participation of employees in productivity gains and a fairer distribution remain the main objectives of our collective bargaining policy.”

Inflation compensation is already paid in some companies

As the boss of the DGB again points out, “there are a lot of distribution possibilities; this has been demonstrated by reports of record earnings and high dividend payments. Most companies could pay raises without increasing prices further. IG Metall has already announced wage demands of 8.2% for the next negotiations in the steel industry.

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Some companies already pay their employees inflation allowances. For example, Böttcher AG will pay its employees significantly higher base salaries from April. Employees whose basic salary is less than 3,000 euros receive an additional 300 euros per month. Employees with a basic salary of more than 3000 euros receive an additional 200 euros.

Company manager Udo Böttcher explains in the “Ostthüringer Zeitung”: “With this short-term measure, we want to compensate for the rising cost of living of our employees in the current year. In March, the rate inflation rate in Germany was at an unusually high level of 7.3%. Prices, which have risen in many areas at the same time, hardly allow any alternative and mean a significant additional financial burden”.

And the chemical industry also agreed in early April with the chemical union IG BCE on compensation for 580,000 employees. In view of the price increase, employees will receive a one-off payment of 1,400 euros by May at the latest. However, wage negotiations are prematurely suspended. In view of the war in Ukraine and the growing risk of recession, the collective bargaining partners have suspended negotiations until October.

Compensating for inflation carries major economic risks

But economists are concerned about claims for inflation compensation. They fear stagflation and, in the worst case, its intensification through a wage-price spiral. Currently, April’s 7.3% rise in inflation is met with slowing economic growth. The economic forecast for 2022, as announced by the federal government on Wednesday, is just 2.2% down from a forecast of 3.6% at the start of this year. Former Bundesbank board member Anreas Dombret told t-online in late March: “The danger of stagflation is there and it is getting worse. It worries me a lot.”

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The consequences of stagflation would be dramatic: when a stagnant economy encounters high rates of inflation, a similar situation would occur as in the 1970s during the oil shocks. At that time, the inflation rate in Western industrialized countries rose from 6% to 13% in two years. At the same time, business investment has fallen and the number of unemployed has doubled.

The formation of such stagflation could even now be favored by the emergence of a wage-price spiral. Encouraged by the current demands of employees for significantly higher wages, such a spiral is likely to form. If employees assert their wage demands, companies must indirectly – through wage increases – raise the prices of their products. Employees, who in turn suffer a further loss of purchasing power, are formulating new higher wage demands. A self-perpetuating vicious circle is created which can ultimately only be broken at the expense of the consumer.

This is why economists like Professor Niklas Potrafke of the Ifo Institute are now calling for an increase in the key rate: “The ECB should raise the key rate as quickly as possible. It is urgent to contain inflation. Because she is in a very big dilemma. If he raises interest rates to curb inflation, he threatens to stifle already slowing economic growth.

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