“Our interest rate hikes will curb demand in the economy“said the chief economist of the European Central Bank (ECB), Philip Lane.
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To get back to lower inflation, we have to realize that corporate profitability will decline for a while and wages won’t quite keep pace with inflation for a while either.
High inflation will have to be reflected in an increase in wages.
I strongly advise companies not to expect the same level of profit in times of high inflation.
Due to the war and high energy prices, there are many indicators that the economy is going to slow down.
We are now making significant interest rate hikes. This should make it clear to companies and workers that demand conditions will be less favourable.
Over time, there will be a recovery in wages, so that the standard of living will start to improve again.
What we have seen in the last year is largely an energy shock, which has caused electricity and gas prices to skyrocket.
Higher inflationary pressure does not necessarily mean that we are going to experience high inflation, because we can take measures against it.
If someone says that the ECB has been passive or inactive, I do not agree.
In the short term, it will not be possible to avoid somewhat larger deficits, but there has to be a clear time limit.
Most of the improvement in inflation will come from stabilizing energy prices and reducing bottlenecksbecause that’s basically an improvement on the supply side of the economy.
Y we expect unemployment to rise. But the dominant issue for now is the supply dimension, not the demand dimension, which is where this relationship would be most important.
Source: Fx Street
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