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FRANKFURT, March 2 (Reuters) – In a remote Arctic village on retreat Europe Central Bank policymakers faced some cold facts last week: workers and consumers law companies profit from high inflation while implementing their project.

The prevailing macroeconomic narrative over the past nine months has been that sharp increases in the price of everything from energy to food to computer chips have led to the euro zone’s 20 increases the costs of companies in the country.

Europe The Central Bank (ECB) responded by raising interest rates by the most in four decades to cool demand, and as higher consumer prices boosted wages and inflation he claimed that he faced the risk of creating a spiral.

A slightly different picture emerged in the Finnish village of Inari, which is intended to give the bank’s Board of Directors a chance to explore topics only touched on in regular meetings, three sources present at the meeting said.

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More than two dozen slides presented to 26 politicians showed the company’s profit margins were increasing rather than shrinking, sources told Reuters.

An ECB spokesman declined to comment for this story.

Paul Donovan, chief economist at UBS Global Wealth Management, said, “It is clear that the expansion of profits in the last six months Europe played a bigger role in the story of inflation. “The ECB is more profit oriented inflation he couldn’t justify what he did in the context of his story.”

Companies that exceed their own costs at the expense of consumers and wage earners prices the idea of ​​raising it may anger the general public.

But it also has implications for central bankers.

Inflation caused by higher corporate margins tends to be self-correcting as companies eventually put the brakes on price increases to avoid losing market share, making it labour makes it a very different animal from the fee-price crowd.

So a new inflation story focused on margins could give the more dovish members of the Governing Council some ammunition to fight further hikes after their resistance proved largely futile over the past year, according to economists interviewed by Reuters.

Discussions, ECB’s 20It is due to continue at the next policy meeting on March 16, promising to raise interest rates to the highest level since the peak of the financial crisis in 2008.

CHANGE OF POINT

The perceived inflation story in the Eurozone is slowly beginning to change.

According to surveys published by the ECB and Germany’s Ifo institute, businesses expect smaller price increases as the outlook for spending and demand becomes less clear.

Greece as some European countries have taken measures to curb inflation in basic goods, France and Spain are discussing similar steps.

“Yields economics suggest we may be witnessing more profit squeezes,” ECB chief economist Philip Lane told Reuters. “European firms prices they know that if they raise too much, they will suffer a loss in market share.”

USAIn , the expansion of profit margins began earlier and has already begun to reverse, albeit slowly and unevenly.

However USAUnlike , there is no official corporate margin data for the euro zone. Instead, national accounts and profit statements of listed companies are used as reliable tools to paint a picture of inflation.

For example, before the global pandemic and the war in Ukraine, euro area consumer goods companies averaged operating margins last year, according to Refinitiv data. 10increased to 7%, a quarter compared to 2019.

The 106 companies included in the survey include French resort owner Pierre et Vacances (PVAC.PA) car ranging from manufacturer Stellantis ( STLAM.MI ) and luxury goods group Hermes ( HRMS.PA ) to Nordic retailer Stockmann ( STOCKA.HE ).

Similarly, according to CBA calculations based on Eurostat data, the bulk of domestic price pressures in the euro area from 2021 onwards labour profits, not expenses and taxes.

Decomposition of GDP deflator, annual change, average 1Q21-3Q22 Separate DISCOURSE

Indeed, wages are growing much more slowly than inflation, according to the ECB’s calculations, which mean that the standard of living of the average worker in the Eurozone will fall by 5% compared to 2021.

Economists say that this is what characterizes the 1970s labour The exact opposite of inflation related to the fee, this period, respectively central bank has become the most used point of comparison in public debates about policy responses.

“The public discourse is to some extent separate from what is happening there,” said Philipp Heimberger, an economist at the Vienna Institute for International Economic Research. “The main risk story going forward is still the looming wage-price spiral, which should make the central bank more aggressive in raising interest rates.”

For example, in ECB President Christine Lagarde’s recent press conference, wages were mentioned 14 times, while margins were not mentioned once. His deputy, Luis de Guindos, also warned that the ECB should be careful because unions could demand excessive wage increases.

“You see a very clear reluctance to discuss profit,” said Daniela Gabor, professor of economics and macro-finance at the University of the West of England in Bristol. “It shows that the distributive policy of inflation targeting is: You’re not going for profit; you’re not going for capital.”

The problem of runaway margins in the United States Former Vice Chairman of the Federal Reserve Bank, now the president It was raised by Lael Brainard, Joe Biden’s top economic adviser, and Democratic senators Elizabeth Warren and Bernie Sanders.

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Even within the ECB, central bank Labor representatives, demanding higher wages for their workers, distanced themselves from what they described as the establishment’s “anti-worker bias.”

They cited, among others, a paper by researchers at the International Monetary Fund showing that wage acceleration has historically not caused wage-price spirals.

PROFIT VS LABOR

Sources said that the ECB politicians gathered in Finland, the savings accumulated during the quarantines, but also of the companies prices they went through similar data sets showing that earnings outpaced wages thanks to their appointment powers.

With those savings depleted and competition returning, things could change for ECB policymakers, who are calling for a recasting of the inflation story.

January Mario Centeno, head of the Central Bank of Portugal, was one of the first to warn of the risk of profit margins rising too clearly, saying it should be put on the European policy agenda.

ECB board member Fabio Panetta later said workers were bearing the brunt of the price hike, while on balance company prices remained stable, even rising in some sectors.

Wages are accelerating as the ECB’s future wage tracker expects growth of around 5% in 2023 for contracts signed in the last quarter of 2022. But this is a massive decrease in real wages over the past year compensation will not, analysts said. .

International of the Ghent International Institute political “The main missing ingredient is the bargaining power of the labor movement, which was structurally weakened by the disinflationary policies of the 1980s and the resulting liberalization of labor markets,” said economics professor Matthias Vermeiren. and European Studies.

According to Eurostat data, during the last inflationary crisis of the 1970s, about 70% of economic output went to workers, 20A little more than % is directed to profit. Now the share of labor is 56%, one third goes to profit.

Sources at the meeting said ECB policymakers considered those differences while retreating to Finland, although their initial findings were fraught with caveats.

Some argue that vacation schemes can boost incomes during a pandemic and stabilize a sustained period of high inflation prices argued that it could increase wage demands in ways that the models developed during the period could not predict.

Your data Franceinterest rate doves may be on hold after inflation in Spain and Germany showed they beat expectations last month.

Added by Balazs Koranyi, Chris Steitz, Philip Blenkinsop, Victoria Klesty, Joanna Plucinska and Thomas Leigh report; Edited by David Clarke

Our standards: Thomson Reuters Trust Principles.

2023-03-02 10:27:34
Source – reuters

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