What works in the fight against inflation? Monetary politicians and economists spoke about this at an ECB meeting in Frankfurt. One of the things they are worried about is rising labor costs.
Monetary politicians from the European Central Bank and economists from banks and universities reported worryingly rising labor costs at a conference in Frankfurt am Main on Wednesday. The idea behind this is that higher incomes lead to more demand and thus cause prices to rise. Conversely, employers are inclined to increase prices to cover their higher labor costs. When prices generally rise, money loses value and inflation rises.
ECB President Christine Lagarde reported on the authority’s “wage expectations calculator” (“Wage Tracker”). “We are monitoring this very carefully,” said Lagarde. At the moment the data is moving in the right direction. “That’s good, but not enough,” she remarked. She reported with concern about previous sharp wage increases.
Minimum wages have risen sharply in some cases
There are current figures for minimum wages. They have risen dramatically in the Eurozone, in some cases. According to Eurostat, incomes based on minimum wages in Germany have risen by a third over the last four years, from 1,544 to 2,054 euros. The values are above the inflation rate, which means that workers in Europe can afford more than before despite higher energy and food prices – which in turn could fuel inflation.
“It is difficult to reduce wages,” said Madrid economics professor Evi Pappa. One participant at the conference raised the question of when trade unionists would realize that, given higher purchasing prices in the economy, the old level of prosperity was no longer achievable for employees.
Braked Work performance
Official data from the statistical authority Eurostat shows that companies had to pay a fifth higher costs for employees at the end of 2023 than at the beginning of 2022. These costs are not exclusively, but significantly, determined by wages and salaries.
Lagarde pointed out that lower productivity also drives up the cost of labor. Last year, two million more people were employed in the euro zone than in 2022. Given the shortage of skilled workers, companies are hoarding staff, said Lagarde. However, if the workforce cannot work at full speed due to a lack of orders, staff becomes expensive for the company.
A curse and a blessing at the same time
After the inflation rate rose to 8.4 percent in 2022, the European Central Bank increased interest rates and tightened requirements for banks. So money became more expensive on the financial market. The result: The inflation rate in the euro area is currently 2.6 percent. Low inflation is one side. On the other hand, higher interest rates slow down economic development. When money is expensive, less is invested – this affects companies as well as private builders.
The question for the ECB’s monetary policymakers is: When can they lower interest rates again? President Lagarde stated that the decision would depend exclusively on facts and reliable data. The data on future inflation is not yet clear. “We are not firmly convinced that we are on a sustainable path,” said Lagarde. The Governing Council cannot wait until everything is crystal clear. “We will know a little more in April and a lot more in June,” Lagarde said. ECB chief economist Philip Lane added: “We will have to calibrate this for a long time.”
The specter of inflation
Inflation is considered an economic policy bugbear in Germany. In 1923, large sections of the population became impoverished due to uncontrolled inflation. After the Second World War, the decline in the value of money was reflected in an ever smaller supply of goods. When the new D-Mark was introduced in 1948, trade and industry released their goods. There was a similar hidden inflation in the GDR. There, a high supply of money was offset by a low supply of goods. Rejection of inflation in Germany is therefore the result of experiences of economic hardship and stories about it.
Even beyond national characteristics, low inflation is important for economic areas. If money remains stable, it can be managed calmly and consistently. It is not senseless debt that is rewarded, but sensible calculation. Trade with countries that use other currencies is highly predictable.