1. Home
  2. Studien
  3. Why Price Stability Matters
Jürgen Matthes / Michael Grömling / Markus Demary / Björn Kauder / Berthold Busch / Gero Kunath / Thomas Obst Externe Veröffentlichung 25. Oktober 2023 Why Price Stability Matters

As of March 2023, overall infation is declining in Europe. However, core infation levels continue to remain well above the 2% mandate of the European Central Bank (ECB). In fact, the current bout of infation should continue to weaken as and when supply-chain disruption and energy shortages abate.

to Download
Externe Veröffentlichung
Why Price Stability Matters
Jürgen Matthes / Michael Grömling / Markus Demary / Björn Kauder / Berthold Busch / Gero Kunath / Thomas Obst Externe Veröffentlichung 25. Oktober 2023

Why Price Stability Matters

Wilfried Martens Centre for European Studies

to Download

Institut der deutschen Wirtschaft (IW) Institut der deutschen Wirtschaft (IW)

As of March 2023, overall infation is declining in Europe. However, core infation levels continue to remain well above the 2% mandate of the European Central Bank (ECB). In fact, the current bout of infation should continue to weaken as and when supply-chain disruption and energy shortages abate.

If prices should decline somewhat from their recent peak levels, their contribution to infation would even be negative, that is, they would contribute to lower infation rates.

However, there are also factors that will prevent a large and immediate decline in infation as soon as these scarcities wane. As import and supply prices have risen very strongly in recent months, it will take some time for these price increases to feed through the value chains into the fnal consumption and consumer prices. This is an important reason why infation will remain signifcantly higher than 2% for the next one to two years. However, after this period infation should come down again to more normal levels, unless signifcant new price pressures or ‘second-round effects’ occur.

An important second-round effect would be a rise in infation expectations among economic actors. This is why the ECB needs to continue to signal its commitment to getting infation down to its target rate of 2% in the medium term. Another important second-round effect—one that is closely connected to infation expectations—is the potential for a wage–price spiral. In fact, this represents the largest current danger as it could lead to high infation becoming much more persistent. Import price increases (and particularly energy price shocks) must not be amplifed by further labour cost shocks, but instead the resulting loss of purchasing power must be shared between employees (through lower real wages) and employers (through lower profts, as frms cannot usually fully pass on higher input costs in their sales prices).

If trade unions force signifcant labour cost increases to keep real wages constant or even rising, renewed cost shocks would lead to new price pressures for frms and force them to increase their sales prices further. This would most likely lead to a wage–price spiral and would force the ECB to raise interest rates even more, thus increasing the costs of disinfation and the danger of a recession.

To prevent a wage–price spiral, it is thus high time for macroeconomic coordination between the various policy actors. Monetary policy should focus on targeting price stability, while wage bargaining and fscal policy should support monetary policy in this objective. Wage negotiation outcomes should include one-off payments by companies on top of normal wage increases. One-off payments would target purchasing power losses but would, at the same time, prevent a long-term increase in labour costs. Fiscal policy should make one-off payments attractive for companies and employees by allowing generous tax deduction possibilities. Even more important, fscal policy should strive to limit the impact of the current large price increases by providing targeted income support for those members of society most negatively affected by higher infation rates. In any case, due to high infation rates and actual supply-side constraints, it is currently not the time for a fiscal stimulus via higher government expenditur

to Download
Externe Veröffentlichung
Why Price Stability Matters
Jürgen Matthes / Michael Grömling / Markus Demary / Björn Kauder / Berthold Busch / Gero Kunath / Thomas Obst Externe Veröffentlichung 25. Oktober 2023

Why Price Stability Matters

Wilfried Martens Centre for European Studies

to Download

Institut der deutschen Wirtschaft (IW) Institut der deutschen Wirtschaft (IW)

Mehr zum Thema

Artikel lesen
Zwischen Sicherheitspolitik, Green Deal und Wettbewerbsfähigkeit – eine europapolitische Bestandsaufnahme
Knut Bergmann Veranstaltung 24. April 2024

Berliner Gespräche Frühjahrstagung: Zwischen Sicherheitspolitik, Green Deal und Wettbewerbsfähigkeit – eine europapolitische Bestandsaufnahme

Das Institut der deutschen Wirtschaft möchte Sie erneut zu einer virtuellen Variante der „Berliner Gespräche” einladen.

IW

Artikel lesen
Jürgen Matthes in Intereconomics Externe Veröffentlichung 9. April 2024

China’s Trade Surplus – Implications for the World and for Europe

China’s merchandise trade surplus has reached an all-time high and is likely to rise further. A key driver appears to be a policy push to further bolster Chinese domestic manufacturing production, implying the danger of significant overcapacities.

IW

Mehr zum Thema

Inhaltselement mit der ID 8880