Despite the persistent inflationary pressure, Europe’s monetary policy continues to hold. However, there is a growing fear that the situation could worsen shortly. This is because the inflationary pressure is increasing rapidly, and the central banks are struggling to fight the trend.
Food and energy prices are the biggest contributors-Europe’s Monetary Policy
Despite a sluggish global economy, high inflation remains a concern for policymakers worldwide. Food and energy prices are two main drivers of inflation in the eurozone, but their relative contribution varies considerably across countries. In October, the euro area recorded its biggest monthly price increase in 40 years, with more than half of its member states recording double-digit inflation rates. Higher oil prices and heightened consumer demand fuel the increase.
The OECD’s June Economic Outlook estimated that Europe’s embargo on Russian gas imports could add up to 1.1 percentage points to European inflation in 2023. It projected 6.6 per cent inflation in advanced economies in July. The Russian war in Ukraine has also affected the EU, increasing energy prices. In the eurozone, more than a quarter of its fertilizer imports come from the affected region. As a result, fertilizer prices are expected to continue to rise.
Fiscal policy must not work at odds with monetary policy.
Many countries used fiscal stimulus programs during the financial crisis to jumpstart their economies. While this increased demand, it also put upward pressure on interest rates. During this time, the Federal Reserve raised interest rates and committed to doing so until inflation was controlled. The Federal Reserve is in a better position to fight inflation than Congress. It can increase interest rates and shrink its balance sheet. However, this strategy will take time to work. It will also impose significant pain on the housing market.
Fiscal policy can help reduce inflationary pressures by bringing supply closer to demand. This will help reduce the amount of interest-rate hikes needed. In addition, it will also help mitigate the budgetary costs associated with fighting inflation. During times of high inflation, a policymaker can help the Federal Reserve by lowering the cost of fighting inflation. A policymaker can also reinforce monetary policy’s effects by limiting economic pain from inflation-reducing actions.
Labour markets remain tight with high inflation and decelerating growth.
Despite the high inflation and decelerating growth, US labour markets remain extremely tight. The unemployment rate edged down to a pre-pandemic 3.5% in September. While this isn’t the worst rate in recent history, it’s not as low as many economists would have you believe.
One of the more popular measures of labour market tightness is the number of job openings vs the number of unemployed. While this may be a good measure, it’s not an exact science. There are many applicants for each available job, and many of them are already employed. And since many companies do more than post vacancies, the number of available jobs may not reflect true labour market tightness.
A new metric for measuring labour market tightness was developed using data from LinkedIn. The metric was derived by looking at the number of jobs open for a given unemployed person. The metric is more accurate than the traditional job openings vs the unemployed number calculation and could indicate that the traditional metrics are a bit skewed.
The outlook of the BOE and the other-Europe’s Monetary Policy
During their December meeting, the Bank of England (BOE) made a major announcement, stating that the UK could be in recession. The Bank has raised interest rates by 75 basis points and has warned that the UK economy will be in a recession for some time. The pound has fallen against the dollar in recent days. The BOE expects the economy to slow down in the next three months. The Bank has predicted that the UK recession will last until 2023.
The Bank of England has been raising interest rates for some time now. Their target for inflation is 2%. But inflation has already soared to more than 6% and is expected to continue rising for the next few months. Soaring energy costs have impacted the UK economy. Russia has cut gas shipments to Europe, leading to a sharp increase in energy prices. The Bank of England estimates that energy bills will take up 3.5% of household incomes in the next two years.