Huddled in a retreat in a remote Arctic village, European Central Bank policymakers faced up last week to some cold hard facts: companies are profiting from high inflation while workers and consumers foot the bill.
The prevailing macroeconomic narrative over the past nine months has been that sharp increases in prices for everything from energy to food to computer chips were ramping up costs for companies in the 20 countries that make up the euro zone.
The European Central Bank (ECB) responded by raising interest rates by the most in four decades to cool demand, arguing it faced the risk that higher consumer prices would push up wages and create an inflation spiral.
But at the retreat in the Finnish village of Inari intended to give the bank’s Governing Council a chance to delve into themes only touched upon at regular meetings, a slightly different picture emerged, three sources who attended the meeting said.
Data articulated in more than two dozen slides presented to the 26 policymakers showed that company profit margins have been increasing rather than shrinking, as might be expected when input costs rise so sharply, the sources told Reuters.
An ECB spokesperson declined to comment for this story.
“It’s clear that profit expansion has played a larger role in the European inflation story in the last six months or so,” said Paul Donovan, chief economist at UBS Global Wealth Management. “The ECB has failed to justify what it’s doing in the context of a more profit-focused inflation story.”
The idea that companies have been raising prices in excess of their costs at the expense of consumers and wage earners is likely to anger the general public.
But it has implications for central bankers too.
Inflation fuelled by higher corporate margins tends to self-correct as companies eventually put the brakes on price rises to avoid losing market share, making it a very different beast to tame than a wage-price stampede.
So a new inflation narrative focused on margins could give the more dovish members of the Governing Council some ammunition to fight against further rate rises after their resistance proved largely futile over the past year, according to economists interviewed by Reuters.
The debate is due to resume at the ECB’s next policy meeting on March 16, when the bank has promised to raise rates to their highest level since the height of the financial crisis in 2008.
Monetary Fund showing that accelerating wages have not historically led to a wage-price spiral.
(REUTERS)