Jannah Theme License is not validated, Go to the theme options page to validate the license, You need a single license for each domain name.
California

Could Europe face a worse inflation problem than America?

Meinflation is coming under. On both sides of the Atlantic, falling energy costs breathe a sigh of relief. Price watchers are now focusing on core inflation, the measure that weeds out volatile food and energy prices, which is usually much slower to rise and harder to bring down. Core inflation in the Eurozone has been higher than in the US since October. Could Europeans face a worse inflation problem than transatlantic countries?

Please listen to this story.
Enjoy more audio and podcasts at iOS Also android.

your browser is

Save time by listening to audio articles while multitasking

Every economist knows Milton Friedman’s maxim, “Inflation is always and everywhere a financial phenomenon.” But the words of the Nobel laureate do not seem to capture the current inflation, where post-pandemic supply disruptions, fiscal spending, energy shocks and labor shortages have created a near-perfect storm that has sent prices skyrocketing. , how much inflation falls depends not only on what the central bank does, but also on how these factors (disruptions, energy shocks, rising wages) affect economies on both sides of the Atlantic. There is a possibility.

In addition to these surprises, there has been an extraordinary uproar in the basic running of the economy of the world of abundance. Covid-19 has changed how people work, what they consume and where they live in a short period of time. Demand for travel, nightlife and snacks surged as pandemic restrictions were lifted. In addition to this, US and European governments have decided to subsidize green technology on an unprecedented scale. Capital, production inputs, and workers must move into growing parts of the economy and away from shrinking parts. Until it does so, the economy cannot produce enough to meet demand.

But changing jobs and investing in new factories and software takes time. Boom speeds up the process. A recent study by Ruediger Bachmann and his colleagues at the University of Notre Dame shows that German workers are more likely to change jobs when demand is higher than during a recession. Another study, using data from the United States, suggests that moving to a growth company significantly increases the wages of those who move. Therefore, current economic changes are likely to cause inflation, which may be desirable. A recent paper by Veronica Guerrieri of the University of Chicago and her colleagues argued that monetary policy should tolerate somewhat higher inflation if workers can find new jobs in times of economic change. claim.

Government policies in the United States and Europe are influencing the pace of adaptation to these changes. The European approach has generally been to try to freeze things during the pandemic. The continent’s governments created generous furlough schemes to keep workers in their existing jobs. Unlike in the United States, there was no stimulus-check-financed boom in durable goods consumption, which required an expansion of production. Europe also did not revitalize its economy to help redeploy workers and capital. If American inflation is the result of economic reforms, it could fall faster than in Europe once that process is complete.

Europe also had to deal with another economic blow. Federal Reserve Board member Julian Di Giovanni and his colleagues show that supply shortages will account for a larger proportion of inflation in 2020-21 compared to the United States. Wholesale gas and electricity prices will start rising in the fall of 2021, followed by oil and coal prices after Russia invaded Ukraine. This has resulted in much higher inflation in Europe, an energy importer, than in the United States.

The consensus in economics is that central banks should not over tighten policy in response to temporary supply or energy shocks. Such an impact is very difficult to deal with and you don’t need another turn of the screw. As long as inflation expectations remain stable, the impact should wane over time. Europe should benefit more than the US from easing supply shortages and falling energy prices in everything from wood to chips. That is if inflation has not taken hold.

Inflation is built into the economy when workers and businesses come to believe that prices will continue to rise. In the worst-case scenario, a wage-price spiral occurs, with workers and businesses unable to agree on how to divide the economic pie. In a tight and flexible labor market like the US, where collective bargaining is rare, wage growth should quickly follow inflation. Wage growth accelerated as inflation began to rise. As a new paper by Guido Lorenzoni of Northwestern University and Ivan Warning of the Massachusetts Institute of Technology argues, this theoretically increases the risk of wage and price spirals. seems to have taken off According to his Indeed, a recruitment website, wage growth in the country is high, but has been depressed for some time.

blessed union

In Europe, wages are often determined in collective bargaining agreements.Beyond EU About 6 out of 10 workers are covered by such arrangements. The deal usually lasts him a year or more, so it takes time for wages to adapt to economic conditions. When inflation started it was great. Wage pressure did not immediately lead to inflation. Unions and businesses can negotiate how the hit to income and profits will be divided. After all, they both meet at the same table each year to check and adjust their inventory. They cover a large part of the economy, so there is reason to take into account the macroeconomic impact of any transaction.

However, the relationship is feeling strained. With European inflation stubbornly high, the union is demanding additional compensation from its members. The German public sector has asked for a 10.5% price hike in the latest round of negotiations. Such delays in wage increases are a normal feature of an economy that has been slow to adjust wages and has been hit by a supply shock. As Lorenzoni and Werning show, real wages usually take a hit before returning to their previous levels. But while America appears to be making progress, the old continent still lags somewhat. The European inflation race has dragged on.

Read more about our column on economics, Free Exchange.
A warning from history for a new era of industrial policy (January 11th)
The Federal Reserve’s great antihero deserves a second look (December 20th)
An Insidious Threat to Central Bank Independence (December 15th)

Sign up for expert analysis of the biggest news in economics, finance and markets. money talka weekly subscriber-only newsletter.

https://www.economist.com/finance-and-economics/2023/01/19/could-europe-end-up-with-a-worse-inflation-problem-than-america Could Europe face a worse inflation problem than America?

Related Articles

Back to top button