Central banks in France and Germany panic over inflation as cheap energy and food ‘disappear’ | world | News

A financial analyst explains the history of inflation amid a 40-year peak

With French and German businesses and households increasingly believing that prices will continue to rise, and that the likelihood of a prolonged period of uncomfortably high inflation is rising, the directors of the Bank of France and the Bundesbank warned as they shared the “bad news” revealed in new research by the two banks.

But why does it matter what companies think? Because companies’ expectations drive their decisions, and when companies expect inflation to stay higher for a longer period, they are more likely to raise prices.

Meanwhile, workers are likely to demand higher wages to compensate for their loss of purchasing power.

This risks creating a 1970s-style wage-price spiral that keeps inflation high, pushing prices in stores even higher.

Treasury Secretary Simon Clark raised the alarm this past week.

He told the BBC: “There is no automatic mechanism between inflation and payment adjustments and we need to be very careful to avoid fueling an inflationary spiral in a way that harms everyone if we allow it to escape us.

This is what the governments of the seventies failed to address.”

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Olaf Schulz and Emmanuel Macron

Problems in EU engines Germany and France as inflation hits countries hard .. Schulz and Macron leaders (Image: Getty)

Mr. Clark added: “If we end up in a world where we say all settlements are trying to match or even exceed inflation, we are in a position to create the conditions that make those expectations come true, and we become self-fulfilling.”

His intervention came after the Bank of England said inflation was set to hit 11 per cent in the autumn as it raised interest rates to 1.25 per cent – the fifth in a row.

Eurozone inflation is now 8.1 per cent – the highest since the introduction of the single currency and more than four times the European Central Bank’s 2 per cent target.

An increase in inflation expectations in the eurozone’s two largest economies is a problem for rate-setters at the European Central Bank (ECB) because it makes their efforts to bring price growth back to the 2 per cent target more difficult.

German households, hit hard by rising food and energy prices as a result of Russia’s war on Ukraine, now expect the country’s inflation rate to average 5.3 percent over the next five years, according to a study by the Bundesbank.

Ukraine’s Energy Minister talks about how the war will affect energy production

German companies expect inflation to average 4.7 percent over the next five years, up from 3.4 percent at the start of the year.

Joachim Nagel, head of the Bundesbank since January, said at a joint conference with the Bank of France that the data was “disturbing” because it suggested expectations for future inflation had become “less firm”.

He also said the survey highlighted the risks of the ECB reacting to higher prices “too little, too late”.

Data from a survey published by the Bank of France showed that French business leaders expect inflation in France to reach five percent a year from now, up from expectations of three percent at the end of last year.

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According to the European Central Bank, inflation expectations rising above their target and wages rising faster than expected are both upside risks for price growth beyond.

She said this after she announced two weeks ago her plans to raise interest rates next month for the first time since 2011.

Bank of France Governor Villeroy de Gallo said he hoped the ECB’s plan would lower inflation expectations and made clear that he did not agree with the bank’s goal of raising interest rates “gradually”, arguing that he favored choosing the term “regulated”.

The Ukrainian crisis and the sudden rise in energy prices have given rise to difficult and uncertain expectations for European central banks.

About a dozen European Union members have so far been affected by Russian gas supply cuts, and while governments’ main concern is of course on keeping their people warm next winter, the numbers matter too.

The bloc’s climate policy chief, Frans Timmermans, said Thursday: “Russia has weaponized energy, and we’ve seen more gas disruptions that have been announced in recent days.

It is all part of Russia’s strategy to undermine our unity.

“So the risk of a complete gas outage is now more realistic than ever.”

On Friday, an EU leader warned that “cheap energy is disappearing”.

“The idea of ​​cheap energy is gone, the concept of Russian energy is basically gone and we are all in the process of securing alternative sources,” said Latvian Prime Minister Krisjanis Karenz.

Meanwhile, European Council President Charles Michel told a news conference at the conclusion of a two-day EU summit in Brussels: “Inflation is a major concern for all of us.

“Russian war of aggression raises food, energy and commodity prices.”

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