Due to the advance of the war and the lack of vision and foresight in the medium term, it is expected that it will go quickly until the suffocation of the poorest and the embrace of the immense middle class begins .
Two months of Russia’s war on Ukraine has so far added a tragic toll of death, refugees, destruction and complete uncertainty about the end of it all. And what is happening in Eastern Europe is, more and more, perplexity at the European summit.
“Do you want to see that now the price of bread will be like that of petrol?” one of my neighbors in Lisbon asked jokingly.
Just kidding, just kidding, until the end of March (the war started on the 24th), the price hike seemed, they said, only bloody in energy and food commodities, but in April it broke through the red line that central banks feared and they did not say: inflation has started to contaminate other prices. It is no exaggeration to say that high inflation has arrived.
In Europe, the official discourse has tried in recent weeks, since the outbreak of the conflict, to control the course of the inflationary narrative: it has insisted that it must be temporary, that next year it will not shouldn’t be like that.
The European Central Bank (ECB) has led the way, with as much programmatic caution or “consideration” as possible, but it’s May and the picture is in sight. It is no longer possible to predict the course of inflation, nor the extent of its irresistible progression nor the duration of this torrent. The war continues and spares nothing, even less the monetarist economists and the econometric models manufactured for the comfort of an inflation of 2% in the euro zone.
That is to say. Nor is it known when the war will end, much less can one assess the scale and scope of the shock waves, today still near the epicenter, that will sweep and sweep the world in this year and in the years to come.
The summary of the inflationary path so far tells us that headline inflation in the euro area is already at 7.5% (year-on-year measurement in April) and that the core inflation indicator, which captures the most stable components and which are supposedly more insulated from the crisis (which purges the effects of energy and unprocessed foods), also soared, touching almost 4%. Both values are almost five times higher than those recorded a year ago, in April 2021. The figures come from Eurostat, from last week.
The Portuguese arrives and asks the Finn to calm down
“Think”, is what Mário Centeno, Governor of the Bank of Portugal and member of the Executive Board of the ECB, asked some of his more verbal or emotional colleagues this week, such as the Nordic (Finnish) Olli Rehn.
The former EU commissioner suggested an interest rate hike in July or thereabouts. Better late than never. Not being Latino, he thinks in his own way, with a map in mind where Finland still borders Russia. That would be it, we don’t know. Helsinki is less than 400 kilometers from Saint Petersburg. It’s more or less Lisbon-Braga, unless it’s a projectile or a drone flying straight.
So think about it. The ECB will and will continue to weigh the fundamentals which then result in very uncertain or unrealistic (inflation) forecasts. A job, shall we say, frivolous at this point.
We know that the ECB decides step by step, according to the signals it receives, but there is no medium-term monetary policy that can resist it. Inflation must enter the axis of 2%, indicates the mission of the central bank which brings together 19 countries.
It is understood, it is understood, that the ECB must grasp and dictate a narrative of stability and predictability for the next steps to have any effectiveness, but the ECB is, as clear as water, stuck in a short-term philosophy term and it reduces your credibility.
The dissonant, somewhat erratic voices began. The Germans have wanted to increase the cost of money for years (interest rate included). Now others are joining. More inflation legitimizes higher interest rates and this can give purchasing power to the euro. In the short term, assuming it is short, it could be important for the brutal shock announced by the European Commission: we will end up with Russian oil and gas by the end of the year (2022).
Of course, apart from the political wishes of Brussels, the ECB can still compensate more with innovative measures (it already happened during the acute crisis of 2012 with a meticulous audacity of Mario Draghi – “we will do what he must and, believe me, it will be enough” – it should not be underestimated), but today we have a purely and simply point-to-point navigation.
It’s not even the Black Sea. It is much greater in the financial and capitalist interdependencies with the United States, China, India and so many global players interested in a solution that suits them. One or more ready-to-wear.
There is recent evidence of the problem, of the inflationary monetary dilemma. There are two photographs of Christine Lagarde. Separating them, 34 days.
On March 10, the President of the ECB, with war in sight, declared that “inflation could be considerably higher in the short term. However, in all scenarios, inflation is still expected to gradually decline and, in 2024, stabilize at levels around our 2% inflation target. the increase in these indicators will be persistent, given the role of temporary pandemic-related factors and the indirect effects of rising energy prices.”
Summary for March 10: Lots of inflation now, yes, but that will fade, probably later this year.
On April 14, not even a month ago, the tone became more serious: this, on the way back, will last even longer than we think.
Lagarde asserted that day, also in Frankfurt, that “the sharp rise in the prices of energy products and raw materials is reducing demand and restricting production” and, subsequently, admits that “inflation has risen significant and will remain high in the coming months, mainly due to the sharp increase in energy costs. Inflationary pressures have intensified in many sectors”.
“Upside risks around the inflation outlook have also intensified, particularly in the near term,” added the former managing director of the International Monetary Fund (IMF).
The short term is until the end of this year. On what comes next, the ECB is trying to instill some “consideration” and beyond that it can’t say anything else. In fact, he stopped talking about it.
Arrived here, it is clear that the observation of prices and inflation expectations are not clear, the poverty of information is enormous, just like the uncertainty and the initial optimism.
However, in the real world
Real poverty is increasing. Inflation, as has been said here, is the harshest and most unequal tax of all. It erodes purchasing power, but among the poorest, it costs much more: everyone must eat, have decent housing, study, pay for water, electricity, heating, transport and communications. Being able to go to the doctor, have surgery. A luxury.
In a lower income, basic goods and services, to maintain decency, are always proportionally much heavier than in a so-called middle income.
Due to the advance of the war and the lack of vision and foresight in the medium term, it is expected that it will go quickly until the suffocation of the poorest and the entrapment of the immense class begins average, where some will tend to blame the poor and the rich for their misfortune. . There was more, actually.
This inflation compares poorly with those of the past, with the cold wars and other oil shocks of half a century ago. In the Eurozone, they say, we have tools and wisdom that were born and developed in the aftermath of the Great Recession, sovereign debt crisis and bank bailouts. It remains to know how to use or invent new tools here and now, and not in the chaos of the big and agitated sea that we can already see from Frankfurt, Helsinki, Lisbon.
Those who go to sea fly on land (according to a popular saying in Portugal). In Finland, there is a similar adage, but in suomi. Lost in predictions, yes, but never lost in translation.