Published on Monday, January 9, 2023

Europe | Inflationary fever and a monetary prescription

As with any fever, inflation in 2022 was only the symptom of serious ailments. So why was the action of the European Central Bank (ECB), which raised rates from 0 to 2.5%, so important?

Key points

  • Key points:
  • The ECB's intervention is indeed timely because, as with any untreated fever, prolonged inflation could trigger secondary ailments that monetary authorities are responsible for preventing.
  • This year, the ECB will continue to prescribe its only conventional medicine: raising interest rates. However, a sea of unknowns will make it difficult to determine the correct dosage. And it is not just because of the uncertain resolution of the war in Ukraine or COVID in China.
  • The ECB has to manage an even deeper epistemic uncertainty: the lack of knowledge of the effectiveness and adverse effects that a rate hike will have on today's economies.
  • However, in the face of this complexity, one thing is abundantly clear: the purchasing power of many families will continue to suffer in 2023. This loss is best visualized when looking at wages, which have been rising at a lower rate than overall prices.

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