What are the reasons for the high inflation rate we are facing? And why is it so hard for the European Central Bank to tackle these issues? Casper de Vries, Professor of Monetary Economics at Erasmus School of Economics, discusses these topics and more in an interview with BNR Nieuwsradio (14 February 2022).
Friedman's adage
The Nibud has shown that the Dutch government’s promised purchasing power improvement will completely vanish due to the rising inflation. This inflation has led us to a situation in which we are collectively poorer than before. The interesting thing about the current inflation is that it does not live up to Friedman’s adage that every type of inflation is always a monetary phenomenon. This inflation is mainly caused by the rising energy prices and partly due to COVID-related economic support measures.
Compensation
De Vries argues that it will be very hard to compensate everyone since this inflation impacts everyone in society negatively. Moreover, compensating everyone may lead to stagflation, something which we have experienced in the 1970s. What can be influenced is the distribution of the burden. For example, we could compensate certain individuals who have been impacted disproportionately hard relative to others. However, the burden of this compensation will press on top of the already lost purchasing power of other individuals.
Central Bank at the sideline?
Since Friedman’s adage does not hold, it is very hard for central banks to tackle this high inflation. The current inflation is caused outside of our own economy, by rising energy prices. Raising the interest level will thus have little impact on the inflation. Moreover, de Vries stresses that the European Central Bank should first reduce the current asset purchase programmes before raising the interest rate.
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You can listen to the broadcast by BNR Nieuwsradio, 14 February 2022, here.