The European Central Bank spokesperson announced that inflation in the Euro Zone is expected to stay around the 3% range up until the end of 2024. ECB policymakers raised rates for the tenth consecutive time by 25 basis points, bringing interest rates to 4%. The ECB was originally targeting a 2% inflation rate target by 2024 but this goal no longer seems possible.
Headline and underlying inflation still remain above 5% and the ECB is struggling to tame inflation. There are many reasons why the ECB is struggling to hold down inflation, and this can be applied to central banks around the world. Monetary policies often take time before the effects are felt. When central banks announce a rise in rates, it could take a few months before the effect is felt, causing lag. Labor markets are also very tight. After the pandemic, everyone has been going back to work, causing a bigger circulation of money. On top of that, wages are rising to combat inflation and retain employees, further adding to the inflation problem. A third and final reason is that the response time to inflation was not timely. By the time central banks responded to inflation and the way they handled inflation, the inflation rates skyrocketed.
European Central Bank. Credits: Charlotte Venema
All these added up spelled trouble for markets around the world. The United States has been fairing well compared to the Euro Zone, with projections showing inflation to be around the low 2% range by 2024. To get the ECB to beat projections, they need policies to improve energy.
Attacking inflation with interest rates is a classic central bank move, but with this modern inflation crisis, increasing interest rates has made lowering consumer spending difficult. People are still spending, wages are increasing, and unemployment is low. Consumers are fighting through the high costs regardless of inflation and interest rates. To tackle inflation, trying to better the energy infrastructure is a pathway the ECB should explore.
Improving energy infrastructure lowers the cost of everything. Manufacturing, filling up your car, and distribution, all rely on energy. Current EU policy on energy shows the European Union looking for voluntary measures to cut down on electricity use by 10% and capping revenue of electricity producers to try to reduce demand to in turn, lower prices. This is not an ideal policy. Demand will continue to remain high especially with winter coming up. The European Union will leave people cold if they try to restrict supply. There are no ways to lower demand and the European Union is misguided.
The United States has replaced Russia as the top supplier of crude oil to the European Union. The EU has also diversified with more supplies from Saudi Arabia, Brazil, and Angola but, the EU needs a mix of domestic digging with imports. The U.S. is also under pressure as OPEC is tightening supply, pipelines being shut down, and energy disputes with Mexico.
The EU temporarily cannot afford to stop using fossil fuels to pursue a green agenda in a time of inflationary crisis. The EU’s pathway toward green energy is a great model for all countries around the world and are leading the charge towards green, but they cannot achieve developing cheaper green solutions if the cost of everything remains high. It’ll make buying and implementing green technologies too expensive. For now, the EU must fund more oil initiatives for the time being to tame inflation and encourage the private sector to recycle oil money into developing green technologies through additional subsidies after the inflation crisis is over to then use these green technologies to limit the impact of a future inflation crisis.
Author: Aleksandros Spaho & Joshua Cheatham
