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Global Economy

On the way to 3-D inflation

If you want to experience the connection between deglobalization and rising prices, you only have to take a look into the basement of the Eckelmann company in Wiesbaden. Here, between file folders and discarded shelves, there is material for the production of control elements – for example for freezers in supermarkets. "We simply use every square meter to stock up on preliminary products from suppliers," explains company boss Philipp Eckelmann. The capital tied up in this way has increased by half to nine million euros, and additional storage space will soon be rented at high prices.

Instead of optimizing costs as in the past decades, it is now a question of maintaining one's own ability to deliver. "The additional costs are then reflected in higher prices for our products," announces Eckelmann. Higher prices are already accepted when purchasing, so that the supply chains become more stable. In addition, more and more companies are bringing production steps back to Germany at higher costs instead of buying cheaply, especially in Asia.

The first D – deglobalization

All of this is happening because the global economy is getting more and more out of step: Brexit, Trump, Corona, the Ukraine war and, above all, the uncertain development in China. According to Professor Adalbert Winkler from the Frankfurt School of Finance and Management, progressive globalization has dampened inflation for around four decades. Globalization seems to have come to a standstill and is even regressing. "Because of deglobalization, we must expect higher inflation rates in the future than in the past," said the financial expert.

The second D – demographics

Another inflationary factor is demographics – the second D – for decades to come. The labor shortage will continue to increase in the future as baby boomers gradually retire. The company Müller – lila Logistik is not only looking for truck drivers, but also IT specialists and many other skilled workers. "There are more jobs than applicants," says company founder Michael Müller. "That means rising wages and salaries."

Deglobalization amplifies this effect when companies can no longer threaten to migrate to cheaper countries as easily as before. "This is increasing the market power of domestic employees. We are currently observing that," says expert Winkler. But higher wages mean higher costs for companies, which ultimately end up with consumers in the form of higher prices.

The third D – decarbonization

The third D in the 3-D inflation stands for decarbonization, i.e. rising costs due to the energy transition. This is exactly what Frank Werner expects for his horticultural business Werner & Werner near Cologne. On the one hand, he is already paying more and more for the new CO2 pricing: since it started last year with 25 euros per tonne, it has gradually increased to 55 euros per tonne in 2025. For Frank Werner’s company, this means additional costs of 25,000 euros in 2025.

On the other hand, he wants to become less dependent on gas, oil and coal as an energy source for the greenhouses in the future: "We would have to add the half a million euros in investment costs plus the rising interest costs for financing a possible pellet system to the prices," says Werner. In the end, these additional costs also end up in higher prices for the consumer.

Higher interest rates curb inflation

The European Central Bank in Frankfurt is required to ensure that inflation does not get completely out of hand with these 3-D cost drivers. Because higher interest rates curb inflation. At the same time, however, the rise in interest rates increases the risk of recession and once again raises concerns about the stability of the heavily indebted countries in the south of the eurozone.

Nevertheless, for the financial expert Professor Winkler it is absolutely clear: "For price stability, monetary policy must become more restrictive. In plain English: Higher interest rates!" Fighting inflation is facing a new challenge: because deglobalisation, demographics and decarbonisation will drive prices up for a long time.

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