A few weeks ago, the European Central Bank (ECB) reported that the inflation target had been adjusted. Since 2003 the inflation target has been less than, but close to, 2 percent inflation in the medium term. From now on, the medium-term inflation target is 2 percent. The adjustment gives the ECB more monetary room to manage both too high and too low inflation. From now on, the ECB can allow a temporary excess in accordance with the policy of the American counterpart, the Fed.
Extra monetary room
Yesterday, the ECB left the current loose monetary policy unchanged. The Pandemic Emergency Purchase Program with a volume of EUR 1,850 billion will remain in place until at least the end of March next year, or even longer until the ECB deems the corona crisis behind us. In her explanation of the interest rate decision, President Christine Lagarde indicated in so many words that the central bank will make use of the extra monetary space created by the new inflation target. The expectation is that inflation will rise in the coming months.
Production costs up
If we are to believe the boss of Unilever, Alan Jope, there is no escape. Almost all raw materials used by Unilever are shooting up in price. The higher costs affect all products, from shampoos to peanut butter. According to Jope, costs and prices will continue to rise until at least the beginning of next year. Not only Unilever, but also Procter & Gamble and Kimberly-Clark are going to increase their prices. About 85 percent of the increased production costs will fall on consumers.
The ECB is of the opinion that the rise in inflation will be temporary and will fall again next year. However, more and more economists are questioning this view. Until recently, the globalisation of the world economy, among other things, kept price rises in check. However, since Trump, and now also under Biden, globalisation has been halted. Meanwhile, the three largest economic power blocks, namely Europe, America, and China, are becoming increasingly protectionist. The “belt and road” strategy of the Chinese is increasingly a thorn in the side of the Americans and Europeans.
The cost of transport has risen enormously. A sea container from Shanghai to Rotterdam has become two to five times more expensive in one year’s time. In addition, the delivery time has increased considerably. More and more companies are deciding to organise their production process closer to home because of the rising geopolitical tensions and increased transport costs. Of course, this goes hand in hand with heavy investments in automation and robotisation of the production process, because the increased labour costs must be compensated by higher labour productivity. It will be a few years before this happens. Until then, the increased production costs will be passed on to the consumer.
Next Wednesday, we will get an update on the US central bank’s monetary policy and interest rate decision. It could well be that the Fed, unlike the ECB, does have plans to cut back on its buying programme.