Europe’s inflation issue has moved into a new phase: from benefits to wages

Europe's inflation issue has moved into a new phase: from benefits to wages

The euro zone’s inflation challenge is moving into a new phase, where the driver of domestic price pressures is shifting from company profits to wages, European Central Bank officials said this week as they warned of a prolonged period of high interest rates. Tried to lay the groundwork for ,

Workers bearing the brunt of high inflation in the eurozone are expected to regain some of their lost purchasing power through wage increases this year. It follows a year in which companies were able to boost profits amid rapidly rising prices and demand for services such as restaurants and travel following the pandemic lockdown.

Bank officials have said in recent days that salary increases are expected this year.

That adds to the challenge policymakers face as wages adjust slowly and risks keeping inflation even more persistent, keeping it above the central bank’s 2 percent target. This may force them to take drastic action to slow down the economy.

But policymakers hope they can avoid this outcome, and do not recognize that the sector is in a wage-price spiral, in which wage prices are driven high and inflation risks spiral out of control.

“We may see wages rise significantly faster but inflation is still falling,” the bank’s chief economist Philip Lane said in an interview Wednesday on the sidelines of the bank’s annual conference in Sintra, Portugal. “Because profitability was so high last year, overall, there is room for a decline in profits to absorb some of the wage increase.”

But crucially, achieving this target depends on companies allowing their profits to absorb higher wage costs and not trying to pass it on to customers through higher prices.

This is the latest concern raised by the central bank about corporate profits and inflation. The bank’s other policy makers, including executive board member Fabio Panetta, warned this year that companies may seek to increase their profit margins even as they reduce costs, which would prolong inflation.

From the middle of last year to the end of March, nearly 60 percent of the domestic price pressure came from gains, Data published on Thursday Shown by the central bank.

This year, “we think we’ll start to see companies realizing that they’re pushing the limits of what their customers are capable of,” Mr. Lane said.

As profits have become essential to determining the inflation outlook, the European Central Bank has stepped up its efforts to acquire data that typically only come out over long time intervals and with little detail. this years, Central bank starts tracking quarterly calls When company executives discuss financial results with analysts as part of the policy-making process, Mr. Lane said.

Eurozone headline inflation rates have eased significantly from their peak last year, and Thursday’s data showed Spain’s inflation rate fell below 2 percent In June. But other measures of domestic price pressures are still quite strong. Inflation data for the entire eurozone for June is due to be published on Friday. Economists polled by Bloomberg expect the headline rate to decline to 5.6 percent from 6.1 percent in May, while core inflation, which excludes energy and food prices, is expected to rise to 5.5 percent from 5.3 percent.

In addition, the central bank estimates that the core inflation rate will remain around 3 percent next year. But there is a risk that the “last kilometre” in reaching the target may prove more difficult than expected, Mr Lane said, adding that it is a concern echoed by the Bank for International SettlementsWhich acts as a bank for the central banks.

“We have a target of 2 per cent – we don’t have a target of 3 per cent,” Mr Lane said. “There is still a lot of work to be done to get from 3 to 2 percent.”

Beyond July, when the central bank is expected to raise rates, Mr. Lane said that because of all the uncertainty about the path of inflation, it is best to have “no clue” about what policymakers will do next. , But they expect interest rates to rise. Restrict economic growth for “a considerable amount of time”.

However, some other members of the Governing Council of the bank have suggested interest rates to rise again in september, And the bank’s president, Christine Lagarde, this week dismissed investor expectations that interest rates would be cut next year, saying monetary policy should be “accommodative” and stay in place “as long as necessary”.

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