One important topic is currently dominating the media: inflation is back. In May, the inflation rate in Germany was 2.5 percent, the highest since 2011, and the Bundesbank even expects a rate of four percent in the fall. What is inflation all about and how can private individuals protect their money from it? Definitely not by burying their heads in the sand like an ostrich.
Let's start with a definition: what does the inflation rate actually mean? The synonymously used terms of price increase or inflation rate express it more clearly: It is the percentage increase in the general price level for goods and services, not for individual products, but across the board. Indices such as the consumer price index provide information on this. The prices of a representative basket of goods, which includes both everyday necessities and items that are purchased only sporadically, such as a new television set, are compared on a regular basis. This makes it possible to derive how the cost of living is developing. If you now have to pay steadily more for the contents of the shopping basket, it becomes clear that your money has less purchasing power and therefore less value.
This effect is currently intensifying strikingly and can be felt in concrete terms. While the inflation rate was 1.5 percent in 2020, it was already 2.5 percent in May 2021. That is the highest level in ten years - and according to experts, only the beginning of the flagpole. The chief economist at Deutsche Bank, David Folkerts-Landau, says in an explosive paper picked up by Handelsblatt that inflation will become the defining economic policy "story" of this decade.
Another issue is supply and demand:
There is also another important aspect:
To cushion the impact of the Corona crisis, central banks pumped an enormous amount of money into the markets last year. In the euro zone alone, the money supply rose by 12 percent to around 14.5 trillion euros in 2020. Statista shows the development since 1997. To date, there is no end in sight. The European Central Bank (ECB) continues to provide money to the markets with its Corona aid program PEPP (Pandemic Emergency Purchase Programme) - currently around 80 billion euros per month, according to the Tagesschau. So there is significantly more money in circulation worldwide, which reduces its value accordingly.
Higher interest rates could help. But these are not in sight. The ECB announced in June 2021 that the central key interest rate would remain unchanged at 0.0 percent and the deposit rate for banks at minus 0.5 percent. Good for borrowers, bad for the value of money.
For people who have their money in bank accounts, this has dramatic consequences. And there are many of them. On average, Germans put away 4,671 euros per capita in 2020. This is not only significantly higher than the European average of 3,121 euros, but also around 30 percent more than in the previous year and more than ever before. The savings rate was 16.3 percent - so every German person saves more than 16 out of every 100 euros. But without investing it at interest, their savings are shrinking, as this chart shows:
So if you want to keep your assets, or ideally increase them, you have to invest them. Fortunately, this works quite well. In 2020, as many people invested in the stock market as last around in the times of the New Economy. Compared to 2019, around 2.7 million more people own shares, equity funds or equity-based ETFs. Digital forms of investment make access to financial assets much easier. The area of sustainable investments is also picking up significantly. The growth rate of investments in sustainable funds increased by 117 percent among private individuals, according to the FNG's Sustainable Investment Market Report.
Hopefully, this is not just a trend, but will evolve into an investment culture that provides the economy with the growth capital it needs, and thus also protects private wealth from inflation. There are even investment products that already factor in the loss of purchasing power, providing a good example of how successful customer centricity also works in the financial sector: Our partner Reconcept adjusts the fixed interest rate on its RE15 EnergieZins 2025 bond annually by a variable portion equal to the inflation rate. The chart below illustrates the difference.