ECB’s de Cos: Price Stability is Best Contribution Monetary Policy Can Make to Reducing Inequality

30 August 2023

By David Barwick – FRANKFURT (Econostream) – Price stability is monetary policy’s best contribution to ensuring that economic growth and employment stand in the way of rising inequality due to inflation, European Central Bank Governing Council member Pablo Hernández de Cos said Wednesday.

In a speech at the Annual Congress of the European Economic Association in Barcelona, de Cos, who heads Banco de España, avoided directly commenting on the ECB’s forthcoming monetary policy decision, focusing instead on how inflation impacts household income distribution.

All the results derived from studying the issue ‘underscore the importance of bringing inflation back to levels consistent with our 2% medium-term objective’, he said. ‘Indeed, price stability is the best contribution that monetary policy can make to supporting sustainable economic growth and employment, and hence to reducing inequality.’

Inflation does not affect household real wealth equally, and the capacity of households to adjust their consumption in response to inflation varies, he said.

With increased inflation persistence, households would be expected to move away from investment in nominally fixed-value assets and from spending on items subject to relatively high price rises, he said.

At the same time, wages would increasingly reflect high past and anticipated inflation, he said.

‘The ability to carry out such adjustments, however, varies across households in ways that can affect how such a shock is transmitted to the economy as a whole’, he said.

Fiscal policy can mitigate the impact of negative inflation effects on those most affected, he said, implying that relevant policies should take into account household income, wealth and spending.

‘Finally, the monetary policy response can also have very heterogeneous effects across households, with a significant larger impact on indebted households with floating rate loans’, he said.