ECB’s Lane: Corporate Profitability and Real Wages Must Decrease to Control Inflation
27 September 2022
By David Barwick – FRANKFURT (Econostream) – The European Central Bank will only be able to restore price stability if workers accept lower real wages and firms accept reduced profitability, ECB Chief Economist Philip Lane said Tuesday.
In an interview with Austrian daily Der Standard, Lane said that high inflation ‘will have to be reflected in higher wages.’ However, workers should not expect the hit from inflation to be entirely cushioned by pay rises, he said, as this would spawn second-round effects that ‘would just prolong very high inflation rates, which would require a much bigger and tougher monetary policy response.’
At the same time, he made clear, the burden should not be borne solely by workers. ‘I would strongly warn firms not to expect the same level of profitability in times of high inflation’, he said. ‘To me, the collective message of balance is important. In order to get back to lower inflation, we need to realise that corporate profitability will decrease for a while and that wages will not fully keep up with inflation for a while either.’
This scenario could occur, he said, given that there were ‘many indicators that the economy is going to slow down’, which would lead both firms and workers to be hesitant about demanding more for their goods and services.
Another reason why both firms and workers would accept some of the higher inflation was ‘that we are now making sizeable interest rates increases’, he said. ‘This should make it clear to businesses and workers that demand conditions will become less favourable. So if you keep raising your prices, you risk losing demand and revenues.’
Lane reiterated the expectation that a combination of more stable energy prices by mid-2023, the ongoing easing of supply bottlenecks, and tighter monetary policy would contribute to lower inflation next year and in 2024.
He defended the ECB against the charge of passivity or inaction. ‘The first job this year has been to take steps to move away from an expanding balance sheet’, he said. ‘We had a sequence where until June, that was the first job. The second job is now raising interest rates.’