Germany’s Inflation Tax and the Rising Cost of Living
Since the introduction of the euro, officially measured consumer price inflation in Germany has not made any great leaps. It has averaged 1.5 percent per year. It reached its highest value in 2008 at 2.8 percent and its lowest value just one year later at only 0.2 percent. In 2020, it has been negative for certain months but was 0.4 percent for the entire year. Do these figures provide a representative picture of the general price trends?
It is not surprising that the answer to this question remains controversial, because price inflation measurements are used to make subjective variables of economic life appear objective. How does the standard of living of citizens change? How much higher is real income today compared to twenty years ago? How much more expensive is a basket of goods of the same quality in one year compared to another? But just what equal quality even means in the course of technological progress and innovation cannot be determined objectively. Therefore, this question will never be answered conclusively.
However, there are also gaps in the official measurement of price inflation, and these can be determined without subjective value judgments. The Harmonised Index of Consumer Prices (HICP), by whose trajectory much of the ECB’s monetary policy is justified, is an index for current consumption. It therefore essentially focuses on consumer goods prices and systematically excludes the prices of capital goods and future goods. Using the HICP to assess the overall standard of living thus reduces citizens to mere consumers in the present. But they are more than that.
Each individual has a more or less developed strategy to plan and make provisions for the future. People are not only consumers in the present moment, but also savers and investors who plan for future consumption (their own or others’). Quality of life is therefore determined not only by how much I can consume today, but also by how well I can provide for tomorrow. This is why price inflation for capital goods and assets is important. However, the HICP does not take it into account.
Moreover, the general tax burden is important. It makes both present consumption and
Article from Mises Wire