«The ECB must continue to raise rates to fight inflation»- Corriere.it

The trend of inflation in the Eurozone is diverging: in June it fell to 1.9% in Spain and instead rose to 6.4% in Germany. Equally discordant are the monetary policy guidelines of the central bankers who make up the ECB council. The president of the Bundesbank, the German Joachim Nagel, for example, never misses an opportunity to reiterate the need to continue increasing the cost of money. “From today’s point of view – said the number one of the German central bank speaking in Frankfurt – interest rates must continue to rise”. Thus, after the 25 basis point increase decided in June, a further increase at the meeting of 27 July now appears certain, as announced by the president Christine Lagarde.

What drives inflation

What will happen after the summer is harder to predict. “The question of how much more interest rates have to go up cannot be answered at the moment,” Nagel admitted. “We can’t even say how long they will stay high and how they will develop afterwards: it depends on the trend of inflation, and this is highly insecure.” The factors behind the race in prices appear in fact not easy to identify. In recent times, monetary and political authorities have especially emphasized the role played by corporate profits. According to the International Monetary Fund, for example, the increase in corporate profits has been responsible for about half of the inflation recorded in Europe in the last two years. In other words, many companies have managed to raise prices more than proportionally to the increase in prices, inflating their profit margins without losing market share.

The business narrative

How was this possible? According to Lagarde, the industry may have exploited the supply disruptions caused by the pandemic to move the meeting point between supply and demand higher. Some economists, such as Paul Donovan of UBS, believe instead that the narrative of the breaking of supply chains has been exploited by large groups to convince consumers of the need to adjust price lists upwards to an extent that is not really justified by the growth in costs of energy and raw materials. An excess of profits that should be put down with a good dose of competition. Finally, still other experts count among the major factors of inflation the generous subsidies granted by governments during the health crisis first and then the energy crisis. The ECB has therefore urged the gradual withdrawal of this aid, which, moreover, Germany has granted more than other eurozone countries.

The role of the energy transition

The Bundesbank president focused attention on other potential inflationary factors. «In the short term – Nagel said – wages, for example, could increase more than expected. This would prolong the inflation wave through second-round effects. Even the high prices of energy, raw materials and other primary products could be passed on to final customers to a greater extent than current projections. According to the most recent ECB surveys, salaries rose by 5.2% in the first quarter of 2023, driven in part by one-off payments to fight inflation. Corporate profits, on the other hand, increased by 6.3% in the same period. In the long term, concluded the number one of the German central bank, unpredictable geopolitical and macroeconomic variables could fuel the price race. “We are witnessing a geopolitical transformation that is probably unprecedented in the current century,” he observed. “Climate change and the necessary decarbonisation of the economy require extensive adaptation measures.”