“European Central Bank monetary policy will cost French households €108 billion in 2022”.

The European Central Bank (ECB) generally follows the policy of the US Central Bank (FED). But since the start of 2021 and the return of inflation, there have been big differences and different strategies. For the first time in two years, the Fed raised its key rates by 0.25% on March 16, 2022, and further increases are expected in 2022. The ECB had to do the same, as did many economists and policymakers because higher rates affect everyone . For whom will the bill be heavier?

“The worst may not yet come, experts warn.”

The consequences of energy prices. Over the past few months, annual inflation in the Eurozone has been above the European Central Bank’s 2% target and close to US inflation, which covers a wider range of goods and services. To the extent that energy prices are fueling inflation a lot in the Eurozone due to the war in Ukraine, the ECB sees this rise in inflation as temporary and that a higher core price would not be the appropriate tool to influence energy prices. The energy crisis has gone global, and while the economy is gradually moving away from fossil fuels, the worst may be yet to come, experts warn.

inflation and growth

Should interest rates be raised in times of war? Today, high inflation gives the European Central Bank two simultaneous problems to solve: inflation and growth. The war on Europe’s doorstep makes it difficult to define the equation. Higher prime interest rates make borrowing rates higher, companies reduce their investment, consumers spend less, and growth will be adjusted downward. To be sure, the ECB prefers to ignore rising food and energy prices and focus on the sustainability of public debt in terms of Europeans’ purchasing power. Politically, this approach is explosive. If citizens are no longer able to get food and energy at good prices almost daily, it could spark popular anger and the ECB should stop doing politics and go back to its mission: first: fight inflation and raise key rates. Are interest rate hikes really a necessary wartime tool? The Fed example shows that although the key rate increased by 0.25% in March 2022, the five-year decline in real interest rates has continued to decline by 0.5% since February 2022.

“Price and wages are rising very quickly.”

Eurozone core inflation is expected to remain at elevated levels according to the macroeconomic outlook for Europe. “It will average 5.1% in 2022, 2.1% in 2023 and 1.9% in 2024.” Moreover, there is still no indication of the wage/price spiral that the majority of economists fear. Because of supply shocks, such as today’s high oil prices, companies are raising prices to protect their margins. Employees try to raise their after-tax wages to keep up with this price increase. Then prices and wages rise so rapidly, that higher prices or higher wages are of no economic benefit to workers or firms selling goods and services.

“The increase in compensation per employee should be 3.6% in 2022 before returning to 2.9% in 2024.”Compared to the average inflation rate of 5.1% in 2022. Thus, each employee will lose 1.5% of his purchasing power in 2022, which he will want to recover, and unit labor costs should increase, due to lower growth in productivity per working person. The wage/price spiral in the US is more worrying than it is in Europe. It is less affected by the war in Ukraine, but is experiencing a general acceleration in demand-driven inflation. The labor market is experiencing bubbles due to the fiscal policy pursued by the US administration. Nominal wages will rise significantly in some industries as firms compete for workers.

The middle class will pay

In the face of inflation, should we continue to buy back sovereign debt? It is worth noting that in order to limit the repercussions on the eurozone economy, in the face of the health crisis of Covid-19, the European Central Bank, like the FED, launched the PEPP (Pandemic Emergency Purchase Program). Through this program, the European Central Bank can buy assets from the market, thus pushing those same assets higher without changing the key rate. This program, like the previous ones, has enormous flaws: flooding the market with liquidity, increasing the size of the European Central Bank’s balance sheet, creating inflation and artificially pushing up the stock market. All programs were justified by the need to combat the downturn that was threatening the time. As we enter a period of high inflation, it seems reasonable to limit the use of these programs.

The Federal Reserve commits in November 2021 to reduce its asset purchases and announces; In February 2022, accelerate the end of the quantitative easing program (quantitative easing or purchase of public debt). But the European Central Bank, the day after the sudden announcement of record inflation in January 2022, renewed its system adopted in December, leaving its rates at their lowest level. It is feared that it will go so far as to launch a new program to buy state debt to avoid fragmentation of the eurozone.

Inflation will tax savings. »

According to the Bank of France’s calculations, the French saved 318 billion euros in 2020 and 2021, including 175 billion euros in forced savings (or Covid savings). For the latest known figures for the third quarter of 2021, total household savings amounted to €6000 billion, with €1.784 billion in life insurance, €1159 billion in paid deposits (savings book A, etc.) and about €2,099 billion in products Stocks (listed stocks, etc.). With an average return of 1.7% for life insurance contracts, a 1% return for savings books, and an average return of 3.3% net of equity product fees, projected inflation of 4.4% in 2022 will result in a loss for the approaching French. 108 billion euros in savings. In 2023, France should expect more difficult days. Its growth should be much lower around 0.4% for Rexecode.

Inflation will tax savings. It seems clear that the ECB will play politics simply by prioritizing the sustainability of public debt over the purchasing power of Europeans. So inflation will tax savings. As long as the war raises prices, governments will have to put in place compensatory measures for low-income people. The middle class will pay, the poor will be helped, and 2022 will be another good year for billionaires.

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