148th Baden-Baden Entrepreneurs’ Talk
Frankfurt am Main, 13 September 2021
Sentiment in the euro area is brightening. Despite growing COVID-19 incidence numbers, consumers and firms are becoming more upbeat about the future. The European Commission’s economic sentiment indicator has improved markedly since the beginning of the year and was near record highs in August.
At the same time, consumer prices are increasing at a faster pace, following years of very low inflation. In August, inflation in the euro area stood at 3%, significantly exceeding the 2% mark that the Governing Council of the European Central Bank (ECB) has defined as its new medium-term inflation target (Slide 2). In Germany, the inflation rate, as measured by the Harmonised Index of Consumer Prices (HICP), hit 3.4% in August – a level not seen in 13 years. And it is likely to continue growing until the end of the year.
People are understandably worried about these developments. Higher inflation lowers the purchasing power and reduces wages and interest income in real terms – that is adjusted for inflation.
Real interest rates on savings deposits in Germany are now visibly negative after the recent increase in inflation (Slide 3). Negative real interest rates are nothing out of the ordinary per se. Both before and after the euro was introduced, there were longer periods of negative real interest rates.