Germany’s Long-Suffering Savers Have a Real Reason to Complain

(Bloomberg) -- In Germany, fretting about inflation is a political currency that never seems to lose its value.

In the past week, for example, at least three national newspapers have run prominent articles telling the populace that their savings -- denied the magic of compound interest by the European Central Bank’s low-rate policies -- are in for a renewed onslaught from accelerating consumer prices. The Bundesbank forecasts average inflation of 1.5 percent next year, whereas rates will likely be around zero.

Business daily Handelsblatt, which in March ran a mocked-up front-page picture of ECB President Mario Draghi burning up a 100-euro note with a cigar wedged in his mouth, published a cover headline on Friday proclaiming that Germany is about to get caught in an “inflation trap.”

Yet a rate of 1.5 percent would still fall short of the ECB’s definition of price stability. It aims for consumer-price growth of “below but close to 2 percent,” a goal that it essentially adopted from the Bundesbank. After more than three years below that threshold -- sometimes far below -- Draghi’s chief concern is that the euro area is still too close to deflation and renewed economic decline.

The typical explanation for why there seems to be a hair-trigger sensitivity in Germany to any threat to the power of money is psychological: It’s about national memories of hyper-inflation in the early 20th century. But there’s something else.

If you look back at real interest rates -- what you receive on your deposits adjusted for the actual rate of inflation -- a clearer picture of why German savers might be disgruntled emerges, and it’s got very little to do with the ECB.

Since September 1968, when the data series maintained by the Bundesbank starts, real rates in Germany were negative in 309 months, positive in 209 months, and at zero for 58 months. In other words, German savers lost money for most of the last 48 years. Oops.

The average real rate over that period was indeed negative, at minus 0.16 percent.

Now though, it’s hard to find many professional economists who are particularly worried about a decline in German purchasing power. Andreas Rees, chief German economist at UniCredit Bank AG in Munich, says that even accounting for the recent rise in oil prices, there’s not much evidence of higher inflation expectations among the populace.

“Frankly, I do not think that the German people expect a strong rise in inflation driven by monetary policy,” he said by e-mail.

Yet if German newspapers are sensing a public concern over price rises, and if policy makers react to it, there is a danger.

“Germany’s excessive fear with inflation generates an obsession with anti-inflation policies and thus the German monetary policy thinking tends to respond asymmetrically,” said Johannes Gareis, an economist at Natixis in Frankfurt. “This thinking can be risky because it’s easy to fight inflation when inflation is on the rise, while it’s difficult to overturn deflation once you are stuck in a deflationary trap.”

--With assistance from Alessandro Speciale To contact the reporters on this story: Jeff Black in Frankfurt at jblack25@bloomberg.net, Jana Randow in Frankfurt at jrandow@bloomberg.net. To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Kevin Costelloe