“Inflation signaled to the market a change of era”
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NOTWe are already in the next world. The very strong price growth during the year is the manifestation of a depleted economic regime. Public action has come back in force, but the recipes of the world before will not be effective. Alternative measures are therefore necessary for us to move forward. The contemporary economic challenge is to protect women and men from the consequences of climate change, while operating a bifurcation of modes of consumption and production. This is how any policy measure to fight inflation should be thought of.
Inflation reflects the scarcity accumulated since 2020: scarcity of goods traditionally imported from Asia, scarcity of cargo ships to transport these goods, scarcity of certain raw materials, scarcity of energy – accentuated for six months by the conflict with the Russia. It took a while to realize that these rarities were the new norm.
Initially, prices fell because of the confinement of our economies: they reflected the sudden slowdown in all activity. Then, they ended up increasing, but we considered the increase transitory, thinking that the rarities were going to be absorbed. Monetary policy has not changed.
In 2022, however, the US and European central banks have changed their position: inflation will not return to 2% without public intervention. In July, the European Central Bank (ECB) stopped buying securities on the market for the first time in seven years, and raised its rates for the first time in eleven years. This has led to an increase in market rates that those who were considering a real estate purchase can attest to.
The transition race
But this change in monetary policy was felt in another absolutely crucial market in the current context: that of public debts. The Italian risk, for example, reached the same worrying level this summer as in March 2020, at the very start of the pandemic. Why such an effect? Since 2015, and particularly since the pandemic, the ECB has been protecting the ability of governments to take on debt. It maintained this market under cover by acquiring public debt. Concretely, it bought the bonds of the Member States from the private banks, which enabled the governments of the euro zone to go into debt at historically low rates. The suspension of these purchases and the rise in rates, which occurred in July, therefore signaled to the market a change of era. To sum up, when inflation became a credible threat, the ECB acted, but this worsened the borrowing conditions of several euro zone sovereign debts, and taking on debt became more expensive for all member states.
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