The institute of the German economy, IW Cologne, has warned of a long phase of economic stagnation with simultaneous high inflation. IW director Michael Hüther warned a longer phase of stagflation was a real danger.
He said: “Europe will be threatened with stagflation if politicians are not careful.
“I’m not talking about this year or the next, but well into the decade that lies ahead of us.”
Mr Huther warned the ambitious climate policies of the EU and the federal government, which rely on rising CO2 prices, could drive inflation in the coming years.
He added how there was a risk the economy in Europe would eventually stagnate.
Mr Huther said: “Our climate policy can trigger a stagflation.
“The risk that the EU economies will hardly grow anymore is real.
“This would happen if we don’t manage to transform the economy and instead overwhelm companies with the energy transition.”
The expert warned if politicians take the German climate goals and those of the EU seriously, the CO2 price must rise in the next few years.
READ MORE: Europe inflation – ECB accused of miscalculating soaring prices
Stagflation occurred in the 1970s as a result of monetary and fiscal policies and an oil embargo.
The price per barrel of oil quadrupled during the 1973 oil embargo and then doubled again in 1979 as a result of the Iranian Revolution.
In October last year, Germany’s inflation reached its highest level in 28 years.
According to the Federal Statistical Office, consumer prices rose by 4.5 percent throughout October compared to the same month in 2020.
The Wiesbaden authority last measured an inflation rate of 4.5 percent in 1993.
In September, inflation had already passed the four percent mark at 4.1 percent.
Compared to September, consumer prices rose by 0.5 percent in October.
Imported goods rose by almost 17 percent – as much as they did during the second oil crisis in 1981.
Over the years, natural gas imports rose by 178 percent, with electricity rising by 136 percent year-on-year.
Coal and iron ore have also seen the price of imports rise by 118 and 97 percent respectively.
In addition, the withdrawal of the temporary VAT cut is now having a full impact.
The regular VAT rates have been in effect again since January 2021, so goods and services are tending to become more expensive again.
Additional reporting by Monika Pallenberg