How does stagflation affect the construction industry

Will inflation come after the corona crisis?

"The warning voices are getting louder: More and more financial experts all over the world fear rising inflation rates in the industrialized and emerging countries for the foreseeable future." That sounds up-to-date, but the quote comes from the Frankfurter Allgemeine Zeitung of January 27, 2011. As before During the financial crisis of 2008 and 2009, voices are increasingly being heard that anticipate considerable inflation risks in the coming years. With the extensive fiscal policy measures to support the economies severely affected by the corona pandemic and the high-dose purchase programs of the major central banks, it is not surprising that many people are worried about the stability of money.

But a look back at the financial crisis and also at the euro crisis shows that the inflation scenarios that were widespread at the time have proven to be incorrect. Given the comparatively short horizon of experience with the corona pandemic, it is not easy to adequately assess the inflationary impulses it may cause. The following assessments should therefore only be viewed as a rough guide.

The experiences so far

From an economic point of view, the corona pandemic is a simultaneous supply and demand shock. On the supply side, the problem of interrupted global supply chains and a lack of availability of labor, especially at the beginning, arose because they had to look after their children. Long-lasting negative productivity effects come from the hygiene regulations, which stipulate that distances and constant disinfection are required. On the demand side, the closure of restaurants and hotels as well as the ban on congresses and sporting events mean a drastic shock for companies and the self-employed who offer services in the area of ​​“social consumption”. Additional negative effects come from consumer reluctance to buy due to short-time working or unemployment as well as uncertainty about further economic development. Many consumers are likely to limit their spending due to the risk of contagion. Rising numbers of infections and the lack of a convincing strategy to combat the pandemic are likely to prompt companies to at least postpone major investment projects.

While the supply shock tends to drive prices up, the disruptions on the demand side tend to have deflationary effects. So far, no major effects of the crisis on consumer prices have been seen since the end of 2019. While the price level in the euro area and Germany in October 2020 was seasonally adjusted by around 0.5% and 0.4% respectively below the level of December 2019, in the USA it was slightly higher in September at 0.7%.

The data for the euro area (see Figure 1) show that prices for unprocessed food experienced a significant surge in prices at the beginning of the crisis, which has not receded until recently. Processed foods have also risen slightly above average. The prices for the other components and the index as a whole (excluding energy) have remained more or less constant. The finding suggests, on the one hand, a certain price rigidity and, on the other hand, the fact that the price-dampening demand effects and the price-driving supply shocks have been roughly balanced. What is clear, however, is the development in oil prices, which have almost halved compared to the beginning of 2020.

illustration 1
Price development of the components of the harmonized index of consumer prices in the euro area
Price indices 12/2019 = 100

Source: European Central Bank, Statistical Data Warehouse.

Inflation development from a real economic point of view

Experience from the past decades shows that price developments in Germany, but also in other advanced economies, have been shaped by developments on the labor market as well as by price shocks on the oil market.

The impetus emanating from the employment situation on inflation can be described by the Phillips curve. It depicts the relationship that exists between wage and price developments on the one hand and inflation expectations and the situation on the labor market on the other. There has been a lot of debate over the past decade as to how far this relationship has weakened. However, a study by the Deutsche Bundesbank (2016) comes to the conclusion that “the Phillips curve can still serve as an important tool for price analysis and forecasting” 1.

Against this background, there should be no major inflation threats in the short to medium term. According to the forecast of the joint forecast (2020) from October 2020, it can be expected that unemployment in all major economies will rise noticeably by 2021 and will also be around half a percentage point above the level of 2019 in 2022. This development is likely to shape the collectively agreed wages to be concluded for the following years in 2022, so that inflationary impulses are not to be expected on the wage side in the foreseeable future.

Beyond 2022, too, it is to be expected that the labor market situation will be shaped by the structural effects that the corona pandemic will have on economic activity. A major boost to digitization can be expected in the entire economy. A study by Bertschek and Erdsiek (2020) shows how strongly the solo self-employed have advanced digitization. An analysis by KfW comes to a similar finding for SMEs. In industry, the experience with the corona pandemic should lead to an even greater focus on robots than before. Joe Stiglitz (2020) put this in a nutshell: "Because machines cannot be infected by the virus, they will look relatively more attractive to employers, particularly in the contracting sectors that use relatively more unskilled labor."

The fact that fewer business trips are likely to be made in the post-corona world is also likely to have a negative impact on the labor market prospects of less qualified employees. This means job losses in the dependent service areas (hotels, airlines, restaurants, taxis, bars, catering). Service companies in city centers are likely to suffer from the fact that fewer people will generally be there as home offices become more widespread.

The effects of the Corona crisis on the labor supply are also unfavorable for prospects on the labor market. We no longer speak of hysteresis effects, but of the scars that result from such shocks for job prospects. Portes (2020) mentions the following points here: In general, unemployment leads to a write-off on human capital. The professional skills atrophy and the mental well-being suffers, which can lead to mental illness. This affects the income and wage prospects in a significant way. These effects are particularly detrimental for younger workers. In addition, the loss of jobs leads to workers (and companies) losing their company-specific capital and being less productive as a result. After all, the crisis has negative effects on the training of young people. Even a relatively short loss of training time has considerable consequences for the development of professional skills (Burgess and Sievertson 2020).

The permanent structural changes in the area of ​​mobility triggered by the corona pandemic - together with the growing importance of renewable energies - should also have a long-term dampening effect on the prices of crude oil and natural gas. The influence of oil prices on price developments in Germany can be clearly seen from a longer-term perspective (see Figure 2). One also recognizes the price-driving effects of the wage development at the beginning of the 1970s and the dampening impulses from the wage moderation that began towards the end of the 1990s. Overall, it is therefore unlikely that energy prices will lead to inflationary effects in the medium term. The picture of a medium-term change in attitude to mobility due to the corona pandemic also includes the effects on the markets for commercial real estate. The demand for office space will decrease, as will the demand for real estate for hotels and brick-and-mortar retail. This will have a negative impact on employment in the construction industry and thus put an additional burden on the labor market.

Figure 2
Inflation rate in Germany and change in the oil price compared to the previous year
Inflation rate in%, oil price: West Texas Intermediate (WTI) in US $

Sources: Federal Reserve Bank of St. Louis, Deutsche Bundesbank.

In addition to all of this, in the period after 2021 there will be a need in many countries to drastically consolidate public budgets again after the high deficits to combat the pandemic. In Germany, the debt brake requires that the debts taken on in 2020 and 2021 must be repaid in an “appropriate time” (Article 109 GG). The federal and state governments are therefore under pressure not only to have a balanced budget, but also to achieve surpluses. If the debt brake is held, which is to be feared, this will result in restrictive demand impulses. If the rules of the Stability and Growth Pact are adhered to in the euro area, there will be considerable consolidation requirements, especially in the southern European economies that have been particularly hard hit by the pandemic.

Inflation development from a monetary point of view

Many viewers see the general sharp rise in national debt as a result of the crisis as a threat to monetary stability. Indeed, it has happened time and again throughout history that this triggered self-reinforcing processes that resulted in hyperinflation. The macroeconomic constellation is decisive for the effects of high budget deficits. In a phase with major bottlenecks on the supply side, such as in Germany after the First World War, a state stimulation of demand can easily lead to inflation. In a situation like the Corona crisis (and the time after it), however, the problem does not consist in supply bottlenecks, but rather in insufficient overall economic demand, which is associated with overcapacities. A chilling example of this is the great depression of 1929 to 1933, which was marked by massive deflation due to inadequate fiscal policy action.

Although, as the Modern Monetary Theory (MMT) rightly states, there are no funding restrictions for fiscal policy in large economies, MMT protagonists always emphasize that the restriction of the real available resources in an economy must be taken into account when one wants to avoid inflation (Tymoigne and Wray 2013).

A look at the 2008/2009 financial crisis shows that a sharp rise in national debt does not have to lead to inflation. At that time, the increase in the national debt ratio (national debt in% of nominal gross domestic product) in the major economies was similarly high, as now expected for the Corona crisis, for example by the International Monetary Fund in its World Economic Outlook from October 2020 for the years 2019 to 2021 (see Figure 3). As already mentioned, the inflation fears at the time have proven to be unfounded.

Figure 3
Rise in debt ratios

Source: International Monetary Fund, World Economic Outlook Database.

There is, however, a clear difference to the financial crisis in the role of the central banks. From the end of 2019 to October 2020, the Bank of Japan, the European Central Bank (ECB) and the Federal Reserve purchased significantly more bonds than in all of 2009. The difference is particularly clear between the Bank of Japan and the ECB (see Figure 4). . This may explain why long-term interest rates for these currencies were significantly higher in 2009 than they are today. The yields on US dollar, pound sterling and euro bonds were 3.3%, 3.4% and 3.8%, respectively. For yen bonds they were 1.4%. From a monetarist point of view, it is of interest what effects the expansion of the central bank's balance sheet will have on the development of the money stocks of non-banks. The corona pandemic accelerated the growth of the money supply in all four currency areas (see Figure 5). In the case of the United Kingdom and the euro area, however, the magnitudes do not go beyond the values ​​observed in the 2000s. In Japan, the increase in the money supply M3 amounted to 7.1%, which is, however, relatively high in historical comparison. With a growth rate of 23.9% most recently, the growth of the money supply in the USA is completely out of the ordinary.

Figure 4
Central bank bond purchases
in% of the gross domestic product of the previous year

Source: Central Bank Statistics.

Figure 5
Money supply growth

Source: Federal Reserve Bank of St. Louis.

This unusual development corresponds to a historically record-high saving rate for private households. This reached a value of 25.8% in the USA in the 2nd quarter of 2020; in the 3rd quarter of 2020 it was still at an unusually high level of 15.7%. This constellation can be explained by a combination of extremely high state transfers to private households in the 2nd and 3rd quarters of 2020, with the at the same time severely restricted consumption options in the 2nd quarter of 2020. The state transfers, which are primarily in the form of very generous unemployment benefits under the CARES Act were so high in both quarters that they by far more than compensated for the crisis-related shortfalls in regular household incomes. As a result, private households achieved an income increase of 12.6% in the 2nd quarter of 2020 compared to the same quarter of the previous year; in the 3rd quarter the increase was still 7.7%. It is difficult to estimate how the private savings generated by excessive government transfers with limited consumption options will affect price developments. In households whose consumption behavior is characterized by intertemporal optimization, the increased wealth is only likely to lead to a consumption surge to a limited extent. Households that make their spending behavior dependent on current income could result in increased consumption after the end of the crisis, which would have a price-driving effect.

Such a one-off effect need not result in a permanent acceleration in inflation. It is crucial that private households' inflation expectations remain firmly anchored. In this environment, the announcement by Federal Reserve President Powell that after periods with an inflation rate below 2% an inflation rate of "moderately above 2 percent for some time" would be aimed for was not necessarily helpful. It is problematic for the formation of expectations when Powell announces that the Fed will not adhere to a certain formula but will pursue a "flexible form of average inflation targeting" (Powell, 2020).


After the still comparatively short experience with the economic policy and economic implications of the corona pandemic, its effects on inflation development can only be roughly estimated. From a real economic point of view, the increased unemployment caused by the shock and the negative effects of longer-term structural changes (lower mobility, increased digitalization, lower demand, especially for unskilled workers) are likely to have a price-dampening effect. In the case of fossil fuel prices, either in the short or medium term, no rising trend is to be expected. Unfavorable prospects for commercial real estate and the need to consolidate, which the public budgets will face after the pandemic has subsided, also have a rather deflationary effect.

From a monetary point of view, increased national debt is not automatically to be viewed as inflationary. If, as in the case of the pandemic, it ensures counteracting a collapse in demand, it rather prevents deflation. In terms of magnitude, the increase in the debt ratio in the G7 countries does not exceed values ​​that were recorded during the financial crisis. However, the funding from the central banks turned out to be significantly stronger than then, which can at least partially explain the significantly lower interest rates for long-term bonds compared to 2009. In terms of the central development of the money stocks of non-banks from a monetarist point of view, the values ​​for the euro area and Great Britain have so far been on the order of magnitude that could already be observed in the 2000s, without any inflationary tendencies resulting therefrom.In Japan, too, the trend is still moderate. This is very different in the United States, where money supply growth is well above the all-time highs. The reason for this are unusually high state transfers, which also enabled unusually high private savings. If these were used to increase consumer spending after the crisis had subsided, this could temporarily lead to overheating.

  • 1 "This paper argues that European inflation behavior is not as puzzling or complex as recent discussions suggest. A simple Phillips curve captures most of the movements in inflation over the twenty years that the Euro has existed ”(Ball and Mazumder, 2019).


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