Central banks are out of luck. In the most difficult moments, they do not hit the target very well, even though they have absolute power in their sphere of competence. Nobody tells them anything. I am referring in particular to the European Central Bank. Its performance during the international financial crisis or Great Recession, whatever you want to call it, could not have been more erratic, if not inopportune. Just as disasters threatened to derail the euro, in extremis acted to prevent it. Of course, leaving a trail of victims in the peripheral countries of the euro zone due to an austerity imposed by the ECB and the European Commission.
Now, when a totally unexpected inflation is unleashed, the authority in charge of preventing it, the ECB in the case of the Eurozone, responds again with recipes that seem to do more harm than good. This also happens in the United States with the Federal Reserve and elsewhere.
They follow the mandate that the neoliberal Milton Friedman continues to impose from beyond: it is necessary to reduce the amount of money available to reduce demand, that is, the propensity to buy, which is what makes prices rise. And this is done by increasing the interest that the ECB, or any other central bank, charges banks when they take money out of there. And there is no other. Eight months have passed since the ECB started to hike and inflation has barely subsided. Prices increased at the time in the eurozone by 8.9% per annum. Core inflation, which does not account for energy or raw food, rises every month. It is in theory what worries the ECB the most.
The engine of inflation started almost a year before Russia began its invasion of Ukraine.
This is how today’s inflation was born: its engine was started almost a year before Russia began its invasion of Ukraine. Oil cost three times as much in January 2021 as it did in the middle of the previous year, and there were still 13 months left before the Russian onslaught began. Natural gas has increased in eight months of 2021 by more than twice its price. And the war was four months away. In that same period, wheat had risen 30% in the international market. Clear. All these essential raw materials were in full swing and continued to do so amidst the bombings. We can call this the first inflationary round, from which those who operated in those markets could benefit: big investors or big corporations.
Then came the following effect: the transfer to citizens’ consumption, increasing the commercial margin and, therefore, the profit margin of companies. The rest of prices skyrocketed. Even discounting energy, inflation not only hasn’t dropped since the ECB started raising interest rates, it’s actually gone up. In the euro zone as a whole, it rose 5.0% per year, before the start of the rate hike, it is now 7.8%.
In 2022 there was no significant increase in demand in real terms
Christine Lagarde and company’s recipe could be valid if in fact the price hike was mainly due to increased demand. However, in 2022, the year in which inflation broke out, there was no significant increase in demand in real terms, that is, without taking inflation into account, which would obviously increase consumption more than expected.
The money supply, in technical terms the M3, is used by monetarists to check whether there is too much money in the hands of the public or not. If money grows excessively, it could mean that inflation is due to increased demand. This is how all neoliberals understand it, who are in charge of the ECB, the Federal Reserve and others. It is the thermometer that would explain why there is inflation and the way to stop it: increase the interest rate, which means that there is less money on the street. Well, when the ECB decided to raise interest rates on July 27 last year, the money supply, M3, was at its lowest level in 28 months.
There are other data that clearly indicate that prices are not skyrocketing because there is a lot of demand.
In 2022, households’ disposable income, the money they actually owned, increased by just 3.6% and average inflation for the full year was 8.4%, although it moderated gradually. The consequence is that individuals did not receive the money they earned, since the expenses that families had to incur increased by 11.5%. It’s not that they’ve wasted, it’s just that this percentage is explained by the increase in prices. For this reason, their savings dropped to the lowest level since 2019. Compensation for all workers rose last year to 5.8%. This percentage increased because there were more people with jobs, but the salary per employee grew by only 2.7%. According to the statistics of collective agreements.
This didn’t happen to everyone. Companies saw their profits grow by 15% over the previous year. Remember, CEOE’s employers raised a cry to heaven and its president, Antonio Garamendi, refused to sign an increase of 80 euros in the minimum wage until he left it at 1,080, while his salary was 400,000 euros.
Businesses benefited from the disproportionate increase in prices
This explains two things. The first, demand, the propensity to consume, does not seem to be the cause of inflation this time. And the second, companies gained a lot, their profits clearly grew above the pace of the economy and of course wages. The explanation is that they benefited from the disproportionate rise in prices, increasing the commercial margin, to the detriment of the consumer.
Now, to the punishment of paying high prices for the products they have to buy, many of them suffer a double penalty: the increase in their installments to pay for the mortgaged house as a result of the ECB’s prescription to lower prices. There are five million homes in this situation, whose property can see that it has risen to a peak. Suppose a mortgage of 150,000 euros is paid off in 15 years. Changing the monthly fee may mean paying an extra 148 euros if the mortgage has a variable interest rate.
Economist and writer José Luis Sampedro is the author of a book that he later updated with fellow economist Carlos Berzosa. It’s from years ago. have right Inflation within reach of ministers. In it, he explains how the reasons for the excessive increase in prices can be many and not necessarily due to increased demand, as Friedman’s monetarist neoliberals imposed more than 50 years ago. And then there’s the dogma. Central banks continue to apply their prescription without further ado. Sampedro recalls that companies’ profits are often behind price increases. Now more than in other times, because the power of oligopolies and big companies is much greater. Another reason mentioned by him is “imported inflation”, due to the increase in energy products and other raw materials. He calls both of these things capitalist inflation. Now, we would say that these are prices born from international speculative markets, such as oil or natural gas, and from the irrepressible desire of entrepreneurs to earn more at the expense of increasing the margins they impose on consumers.
According to Reuters, a team of 26 ECB economists held a quiet and safe but very cold retreat in a small town in Finland during the last week of February. The objective was to isolate themselves in order to elaborate proposals on the monetary policy that the board of the issuing bank had to agree on. The idea that prevailed there did not coincide with the line followed by the ECB in combating inflation. They concluded that companies’ margins increased at the expense of consumers and wage earners. Since then, the Governing Council has met once and raised interest rates again.
It’s not that the monetary authorities don’t know about these things. It is simply that they have grown up with a creed, neoliberalism and monetarist orthodoxy, and there is no one to take them away. Dogma is dogma.