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ECB warns for inflation danger.

 

ECB
The European Cent­ral Bank’s pres­id­ent has warned of the risk of a «tit-for-tat dynamic» between com­pan­ies and work­ers that pushes up profit mar­gins and wages, increas­ing price pres­sures as both groups try to avoid a hit from higher infla­tion.

Christine Lagarde said yes­ter­day that the ECB’s recent increases in bor­row­ing costs were «only start­ing to take effect now», and signs that infla­tion was per­sist­ing at high levels meant it had to «bring rates to suf­fi­ciently restrict­ive levels to damp demand».

«This makes a robust strategy going for­ward essen­tial. So far, we do not see clear evid­ence that under­ly­ing infla­tion is trend­ing down­wards. Instead, we see two forces push­ing under­ly­ing infla­tion in dif­fer­ent dir­ec­tions».

Lower energy prices are push­ing infla­tion down, but buoy­ant domestic demand is off­set­ting this, as com­pan­ies raise profit mar­gins and work­ers seek higher wages in tight labour mar­kets.

The euro climbed after Lagarde spoke, rising 0.3 per cent to a five-week high against the dol­lar of $1.080.

Echo­ing this, Ger­many’s eco­nomic coun­cil warned yes­ter­day that fin­an­cial mar­ket instabil­ity could under­mine efforts by cent­ral banks to fight infla­tion, as it pre­dicted price growth of 6.6 per cent for Ger­many in 2023.

Lagarde called for a «fair bur­den­shar­ing» between work­ers and com­pan­ies to dis­trib­ute the losses caused by higher infla­tion, which she said would bring wages and price pres­sures down. But if both groups «attempt to uni­lat­er­ally min­im­ise their losses», it could push up profit mar­gins, wage growth and prices all at once. «The risk of such a ‘tit­for-tat’ dynamic is also heightened by the pro­spect that labour mar­ket tight­ness will linger,» she said.

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  1. Charles23 March 2023 at 12:38

    If Lagarde is waiting on companies and workers to be fair, she is mistaken. This is not happen. Companies want bigger profits and workers want to be paid more. Both don't care as much about the harm they are doing to the economy and how their actions will increase prices. They care about themselves.

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    Replies
    1. Alvin23 March 2023 at 14:02

      You need to come up with measures that encourage the right behavior and make the wrong one unwanted. This is how you solve this not by asking everyone to be "fair". It will never work.

      Delete

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