European Central Bank chief economist Philip Lane, the man with his foot practically on the interest rate pedal, was back in his alma mater Trinity College yesterday for a guest lecture on inflation. Lane gave a typically forensic account of price growth in Europe, and the wide range of factors driving it while acknowledging that the surprise uptick in core inflation in February caught policymakers somewhat off guard. The measure, which strips out energy and food prices, rose from 5.3 per cent to 5.6 per cent. That’s a record for the euro zone, and a reading that will underpin expectations of higher interest rates.
Apart from signalling rate rises would continue beyond March, Lane pinpointed a perplexing trend highlighted in the February numbers, namely goods inflation. Price growth in the goods category should have come down demonstrably with the reopening of supply chains globally and the Chinese economy, he said.
“The current strength of goods inflation suggests that the easing of bottlenecks is not yet feeding through into retail prices, even if there are indications of easing at the intermediate stage in the pricing chain,” Lane said in his address.
The former Irish Central Bank governor linked the anomaly – among other things – to increased corporate profits. “Limits to short-term supply elasticities meant that the recovery in demand enabled firms to also increase profit margins in those sectors exhibiting supply-demand mismatches,” he said. Have firms been profiteering on the back of the crisis? Lane wouldn’t say it like that but the implication was there. Government ministers here have repeatedly accused firms, albeit in the services sector, of jacking up prices in the wake of the pandemic, particularly hoteliers.
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Another thing perplexing policymakers has been the strength of labour markets globally in the wake of rapid monetary tightening. Technically we would expect to see a reversal in employment when interest rates lift but vacancy levels in labour markets across the globe remain high. One possible explanation is the rise in part-time work. While employment remains strong, hours worked, a different measures and a different way of looking at the labour market, is weaker, reflecting perhaps a greater incidence of part-time work.
Lane said wages were likely to be a prime driver of inflation over the next two to three years, highlighting the importance of long-term wage dynamics.
