Martens Centre
  • Home
  • About
    • Who we are
    • Team
    • Bodies and Experts
    • Members
  • Publications
  • Events
  • News
  • Blog
  • Contact

Warning: Undefined variable $lock in /home/clients/0aee7ac7fc8ad72a3a23bcc4ca043604/web-martenscenter.eu/wp-content/themes/martensamp/header.php on line 443
back

Publications

Why Price Stability Matters

27 July 2023

As of March 2023, overall inflation is declining in Europe. However, core inflation levels continue to remain well above the 2% mandate of the European Central Bank (ECB). In fact, the current bout of inflation should continue to weaken as and when supply-chain disruption and energy shortages abate. If prices should decline somewhat from their recent peak levels, their contribution to inflation would even be negative, that is, they would contribute to lower inflation rates.

However, there are also factors that will prevent a large and immediate decline in inflation as soon as these scarcities wane. As import and supply prices have risen very strongly in recent months, it will take some time for these price increases to feed through the value chains into the final consumption and consumer prices. This is an important reason why inflation will remain significantly higher than 2% for the next one to two years. However, after this period inflation should come down again to more normal levels, unless significant new price pressures or ‘second-round effects’ occur.

An important second-round effect would be a rise in inflation expectations among economic actors. This is why the ECB needs to continue to signal its commitment to getting inflation down to its target rate of 2% in the medium term. Another important second-round effect—one that is closely connected to inflation expectations—is the potential for a wage–price spiral. In fact, this represents the largest current danger as it could lead to high inflation becoming much more persistent. Import price increases (and particularly energy price shocks) must not be amplified by further labour cost shocks, but instead the resulting loss of purchasing power must be shared between employees (through lower real wages) and employers (through lower profits, as firms cannot usually fully pass on higher input costs in their sales prices).

If trade unions force significant labour cost increases to keep real wages constant or even rising, renewed cost shocks would lead to new price pressures for firms and force them to increase their sales prices further. This would most likely lead to a wage–price spiral and would force the ECB to raise interest rates even more, thus increasing the costs of disinflation and the danger of a recession.

To prevent a wage–price spiral, it is thus high time for macroeconomic coordination between the vari­ous policy actors. Monetary policy should focus on targeting price stability, while wage bargaining and fiscal policy should support monetary policy in this objective. Wage negotiation outcomes should include one-off payments by companies on top of normal wage increases. One-off payments would target purchas­ing power losses but would, at the same time, prevent a long-term increase in labour costs. Fiscal policy should make one-off payments attractive for companies and employees by allowing generous tax deduc­tion possibilities. Even more important, fiscal policy should strive to limit the impact of the current large price increases by providing targeted income support for those members of society most negatively affected by higher inflation rates. In any case, due to high inflation rates and actual supply-side constraints, it is cur­rently not the time for a fiscal stimulus via higher government expenditures.

ENJOYING THIS CONTENT

Stay up to date by joining our database !

Download the publication

Why Price Stability Matters

Research Papers

Jürgen Matthes

Michael Grömling

Markus Demary

Björn Kauder

Berthold Busch

Gero Kunath

Thomas Obst

Edited by

Eoin Drea

Research Team

  • Economy
  • Macroeconomics

Related publications

Policy Briefs

The 7Ds

The 7Ds

Other

Policy Briefs

Policy Briefs

IN BRIEF

Ukraine

You might also be interested by

Europe’s Competitiveness Compass is Pointing in the Right Direction – But it Overlooks the Workforce Crisis

Blog

04 Feb 2025

Friend or Foe? An Economic War With the U.S. Should Inspire Greater Canadian Autonomy

Blog

30 Jan 2025

It’s the Economy or Bust for Europe’s Centre Right in 2025

Blog

07 Jan 2025

On Revenants in Economic Policy: Taxing the Rich

Blog

31 Oct 2024

The Euro’s Weak Heart Threatens its Survival

Blog

17 Oct 2024

Trapped in an EU of Central Governments? The Future of EU Cross-Border Regions

Blog

28 Mar 2024

Brussels is About to Protect Citizens from Intelligence

Blog

13 Feb 2024

20 Years of Neglect and Regret: Why Competitiveness Will Haunt Europe in the 2024 Elections

Blog

13 Dec 2023

Thinking Talks Ep.9 – ‘The Spectre of a new Banking Crisis’ with MEP Luděk Niedermayer

Multimedia - Thinking Talks

31 Mar 2023

Related events

09 November 2023

Publication Launch: Middle-Class Concerns and European Challenges

ACE Events, Avenue d’Auderghem 22,1040 Brussels

In-House Events

10 - 11 October 2023

European Ideas Forum 2023

DoubleTree by Hilton, Brussels

In-House Events

Stay updated on Martens Centre Activities, Events and Publications

Copyright © 2025 | Martens Centre ALYS

Manage Cookie Consent
To provide the best experiences, we use technologies like cookies to store and/or access device information.
Functional Always active
The technical storage or access is strictly necessary for the legitimate purpose of enabling the use of a specific service explicitly requested by the subscriber or user, or for the sole purpose of carrying out the transmission of a communication over an electronic communications network.
Preferences
The technical storage or access is necessary for the legitimate purpose of storing preferences that are not requested by the subscriber or user.
Statistics
The technical storage or access that is used exclusively for statistical purposes. The technical storage or access that is used exclusively for anonymous statistical purposes. Without a subpoena, voluntary compliance on the part of your Internet Service Provider, or additional records from a third party, information stored or retrieved for this purpose alone cannot usually be used to identify you.
Marketing
The technical storage or access is required to create user profiles to send advertising, or to track the user on a website or across several websites for similar marketing purposes.
Manage options Manage services Manage {vendor_count} vendors Read more about these purposes
View preferences
{title} {title} {title}
Exit mobile version
To provide the best experiences, we use technologies like cookies to store and/or access device information.