When domestic statisticians a few days ago published July inflation, economists and central bankers shook their heads in disbelief. No one expected consumer prices to rise so sharply year-on-year – by 3.4 percent.
They are also taken aback elsewhere. For example in Germany. The inflation rate soared there even more significantly in July – to 3.7 percent, which is the highest since the early 1990s.
Rapid inflationary pressures in 2021 are a global issue. Significant inflation is an echo of the pandemic. Like when we come to the office after fourteen days of illness and have to – even more weakened by the illness – catch up on what we missed during those two weeks, handle all e-mails, and still solve the normal daily agenda. We also have less time, we are overwhelmed, time is precious to us. Time is getting more expensive.
Time, goods and services are now becoming more expensive in the world. The planet is catching up last year lost. She is trying to catch up on production, which she missed last year. Suddenly, the world wants to make more cars, build faster, so there are no car chips or building blocks. They do not manage to produce also because the factories until recently applied strict anti-pandemic measures, which slowed down production and thus made it more expensive. Time is money. In addition, the transport crisis is raging. Missing shipping containers. In Asia, loading is being reduced due to anti-pandemic measures in ports, now again in connection with the covid delta mutation.
Current inflation it is mostly only temporary, as when, after returning to work after illness, we finally manage to catch up on everything missed – but temporary inflationary pressures will follow the temporary inflation. These include the “green revolution” of the European Union, which will make everything more expensive – by tens or even hundreds of percent. The EU climate package proposal presented in July will increase the price of everything produced or operated by fossil energy, including steel, cement, aluminum, cars, housing, electricity, airline tickets, imported goods, from electronics to clothing to food …
Unfortunately, due to rapid inflation today, it is doubly true that “he who saves, burns”. Common saving today it is practically the fastest way to poverty – due to record low, almost zero interest rates on bank deposits.
They are even worse in Germany. They are now showing higher inflation, with many Germans even having a negative nominal interest rate on their deposits. The negative interest rate on deposits is a consequence of the sharing of the euro and the policy of the European Central Bank. It cannot bankrupt Greece and Italy, which is why it is currently keeping its interest rates at a record low, even in the red. The European Central Bank thus finds itself in a “debt trap”, facing the practical impossibility of raising its interest rates. The Czechs also pay for saving Greece and Italy, and thus for saving the eurozone as such, albeit less than Germans; less than if they had paid directly in euros.
Even for the Czechs, the rate of appreciation of savings has significantly decreased. In the 1990s, so many were condemned by the left today, it was still possible to “live on interest”. It is no longer possible today. The present avoids debtors and wastage, while harming creditors, savers and responsible management. The left is perversely pleased with such a period, although an integral part of responsible management is also the reduction of waste, including that of natural resources.
In the mid-1990s, during the one-year notice period on the capital passbook, the saver received an interest rate of, for example, fourteen percent. Thus, whoever established such a passbook at the end of 1994, for example, enjoyed an appreciation of their savings by 4.9 percent above the level of inflation over the next twelve months. Consumer inflation in 1995 was 9.1 percent.
The average gross monthly wage in the same year corresponded to 8,307 crowns. So whoever wanted to “live on interest” in 1995 so that the real annual appreciation of his savings corresponded to the amount of the average gross annual wage, 99,684 crowns, had to put slightly over two million crowns, about 2,035,000 crowns, on the book. This was approximately twenty times the then average annual wage. Today, such money would not be enough for “living on savings” even remotely. Even a deposit corresponding to a thousand times the current gross average annual wage is not enough at all today.
The situation can be adapted by limiting the holding of savings on current deposits or savings and term accounts. This money needs to be invested instead. The problem is that investing it is always riskier than saving. Although you can find investment products that are relatively low risk, it is still true that without taking the risk of losing money, one loses money today for sure.
In short, it is necessary to take the risk of investing so that money does not eat us savings, or inflation higher than interest on deposits.
The author is the chief economist of Trinity Bank and a member of the National Economic Council of the Government (NERV).
