Understanding Inflation: A Comparison of US and European Economies

2023-07-18 09:17:54

Today inflation in the United States is 3%, against 8% in 2022. In Europe, inflation is still around 5.5%. This is therefore a higher figure than in the United States. This is normal: the European Central Bank began to fight against inflation several months behind the United States.

Between the moment when a central bank raises its interest rates and the moment when the latter take effect, it takes between a year and a year and a half to see the impact on the real economy.

But this drop in inflation is not strong enough in the eyes of the central bankers who steer our interest rates. Whose fault is it? Some will say that it is the fault of the companies which have not been able to increase their prices for years and are catching up today. Then there are those who somehow blame the workers in Europe who, taking advantage of the tight labor market, have demanded an increase in their wages which is fueling inflation. This is called second-round inflation, with the concern that, unlike gas or oil, which can fall, wages cannot.

Both views are correct. Except that wage increases are often lower than inflation. But as there is an economic slowdown, this tension on the job market will undoubtedly subside and wages will return “to normal”. As for companies, they cannot continue to increase their prices indefinitely.

So yes, inflation should normally fall further within a few months. And, logically, interest rates could fall around the middle of 2024. But that’s an unsurprising scenario. However, for three years, life has not been stingy with surprises.

#Inflation #strong #fault

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