In an analysis published on Friday 14 June by the European Parliament’s Directorate-General for Internal Policies of the Union (IPOL), researchers Jens van’t Klooster and Isabella Weber sought to link the challenge of financing climate change mitigation and adaptation, and economic resilience, with that of preparedness for shocks – which will become more frequent in Europe – and the governance of inflation. The authors are of the opinion that monetary policy alone is not the right tool for managing “shockflation”.
This phenomenon stems from sectoral shocks (disruption of supply chains, shortages, etc.) which impact specific “systemically significant” prices.
Shockflation is gradually transmitted throughout the economy. Firstly, during an ‘impulse’ stage, when companies transmit these shocks across the economy to protect their margins.
A ‘propagation + amplification’ stage may then follow, when workers seek a catch-up of their salaries to preserve their purchasing power, resulting, if necessary, to second-round effects in the form of a wage-price spiral. [At present, companies seem to be absorbing wage increases through their profit margins, and there is no wage-price spiral; editor’s note].
A third phase of distribution known as the ‘conflict’ stage may then take place, should a new inflationary cycle begin.
According to the authors, the current governance structure presents the EU with a dilemma, particularly when shocks are becoming more frequent and severe: either do nothing or take drastic action.
They believe that tactically speaking, the current European response of raising key interest rates is happening too late. The spread of inflation is already well advanced and comes at a high cost, affecting lower incomes and the potential for public and private investment needed to meet challenges such as the climate crisis and environmental crisis.
The two researchers recommend reforming the inflation governance within the limits of the treaties, in order to respond to ‘shockflation’ from the first stage. They propose a model including greater coordination between the Council of the EU, the European Parliament and the European Central Bank to harmonise the governance of inflation in the various sectors of the European economy. Their model combines a price monitoring system including an array of measures, particularly sectoral measures, designed to avoid impulse stages and deal with the proliferation and amplification of shocks.
To find our more, go to: https://aeur.eu/f/cpq (Original version in French by Émilie Vanderhulst)