Price caps are of no use

EThere is a strong tendency to view disruptions in international supply chains and the unexpectedly sharp rise in inflation rates as a transitory phenomenon. And there is actually good news to be heard: the factories in Vietnam and Malaysia that were paralyzed by the pandemic are mostly working again.

But the rise in the price of energy, which in some cases conceals serious supply difficulties, is likely to remain a phenomenon that people will have to deal with for some time to come. And whether the expected decline in inflation rates will last in the coming year remains to be seen.

Task for the ECB and the Fed

Politicians are increasingly under pressure to respond to people’s dissatisfaction with rising prices and supply shortages. In the short term, there will be little that can be done about the situation. Should rising energy prices prompt governments to review energy taxation, that should not be blamed.

However, from the period of inflation half a century ago it is known that there is no point in setting rigid price ceilings as a state for goods whose prices usually take place in markets. This phenomenon has since been known as dammed inflation. It tries to hide the inflation process, but usually only works temporarily because the price caps imposed by the state do not change the causes that led to the price pressure.

Experience since the Second World War has shown that increases in the price of raw materials were often the start of inflation, but they are usually not in a position to fuel longer-term inflation processes on their own. This requires wage-price spirals triggered by excessive wage increases and a monetary policy that underestimates the dangers of inflation.

Even in the absence of strong unions, a looming shortage of highly skilled workers may put pressure on wages in the coming years that central banks cannot simply ignore. Monetary policy is facing major challenges.

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