The Cost-of-Living Crisis in the Euro Area: Lessons Learned

Helene SCHUBERTH * Chief Economist, Austrian Trade Union Federation (ÖGB). Contact: helene.schuberth@oegb.at.

Five narratives haven't framed the perception and assessment of Europe's cost of living crisis: monetary policy has mainly been deemed as the best means to get inflation back on target. Policymakers should refrain from direct price control measures, in particular in the energy sector, otherwise they risk distorting resource allocation. Views about the fundamental drivers of inflation have shifted between excessive profit and wage claims, with the dominating concern ultimately becoming the risk of a wage price spiral. European economies, which are net energy importers, were hit by a negative terms-of-trade shock, requiring an income-distribution neutral orientation for wages on the GDP deflator instead of the CPI, which includes imported goods. Finally, policy should focus on supporting low-income households. However, in some countries establishment macroeconomics thinking prevented strategic price controls and measures to prohibit price gouging from being taken.

As inflation hit European economies starting in summer 2021, five narratives have been dominant in the debate of most economists. First, monetary policy was prioritized as a means to bring down inflation; this was supported by, above all, the claim that – alongside with the energy price shocks – demand-driven inflation has been playing a dominant role too. Second, any direct price control measures, in particular with regard to energy prices, as implemented by some countries early on, were strongly opposed. In general, it was argued that price signals, reflecting commodities' scarcity, should not be blurred by price control measures; moreover, many viewed rising energy prices as supportive to the necessary ecological transformation. Third, as data came in suggesting profits were an important contributing factor to the inflation surge,…