Firstly let me wish you all a Happy New Year as we advance into the first main trading day of 2023. We do have a link with the latter part of last year as I ended it by suggesting that the European Central Bank was on the cusp of a major policy error. Indeed it would be compounding its problems with inflation where it was the last of the central banks to respond to it soaring as it followed the claims of ECB President Christine Lagarde.
But we see it as a hump and a hump eventually declines, and that is what we project for 2022.
Instead it soared into double-digits and was still 10.1% in November.
We learned more on New Year’s Eve as her cheerleading for Croatia hit trouble.
So it fully deserves to be admitted to the euro area on 1 January 2023, and it is wonderful to welcome the 20th member to the family when we are celebrating the 20th anniversary of euro banknotes and coins. This is big news and a reason for all of us to celebrate!
Which led to this reply about joining the Euro.
but the most prominent ones – such as lower interest rates and more favourable borrowing terms – have become less convincing due to a change in circumstances. People worry that the euro will only spur inflation.
It is rather awkward that Croatia which is essentially joining for lower interest-rates is doing so just as the ECB is not only raising then but pumping up the rhetoric about further increases.
Interest rates are increasing for everyone. At the moment, ECB policy rates must be higher to curb inflation and bring it down to our target of 2%.
Even President Lagarde must have struggled with this claim.
We have a mandate to ensure price stability, and we have to fulfil it.
Although at 67 she is capable of claiming this.
because it is difficult, especially for elderly citizens,
Wage Problems
The meat of the economics lecture from President Lagarde came in this bit of her interview, and the emphasis is mine.
An important factor in this respect is that we must not allow inflationary expectations to become de-anchored or wages to have an inflationary effect. We know wages are increasing, probably at a faster pace than expected, but we must be wary that they do not start fuelling inflation.
We saw Bank of England Governor Andrew Bailey crash and burn on the wage growth issue last year and you might think that someone with a partner who is a billionaire might have the sense to steer clear of this! But remember this is the person who criticised the Greeks for not paying their taxes whilst in receipt of a tax-free salary as President of the IMF.
But there is a much deeper issue as 2022 brought heavy real wage falls for the Euro area. Back on December 23rd I noted this from former ECB Vice-President Constancio.
Eurostat just published the labour costs increases in Q3. YoY they decelerated from Q2 to Q3.The wage component increased nominally by only 2.1% and the non-wage part by 5.3% so that total labour costs were up by 2.8% in the euro area. Huge drop in real wages. Still, no spiral.
Which by my calculations meant this.
Wage growth decelerated as inflation picked up as the third quarter saw Euro area CPI rise from 8.9% in July to 9.9% in September. So we are looking at an annual rate of fall for real wages of 7%. Actually I think it is worse than that due to the way that weights for energy will under record what has taken place due to the large changes we have seen.
So the reality has been that wage growth has in fact been something of a brake on inflation. We see President Lagarde refer to the December ECB macroeconomic forecasts and it confirms that.
Wage growth, as measured by compensation per employee, is projected to increase from 4.5% in 2022 to 5.2% in 2023 before declining to 4.5% in 2024 and 3.9% in 2025 as inflation declines.
As you can see even the claimed 4.5% is well below inflation levels and it would be quite a surge from the 2.1% we noted in the period to the third quarter. Also the more timely indicator from the Bank of Ireland has suggested a fading of wage growth although from a higher level. Assuming they are right about wage growth for this year that seems set to only give a small real wage rise at best,especially compared to the 2022 fall. The idea that they have any real idea about 2024 and 25 is maybe even too much for parody.
Compared with the September projections, wage growth has been revised up by a cumulated 1.4 percentage points over 2022-24 mainly on account of higher compensation for inflation.
As you can see the numbers have changed substantially in just 3 months. So the forecasts for 2024 and 25 are really about the ECB putting out an agenda which suits it. This returns me to this part of the Lagarde statement.
we must not allow inflationary expectations to become de-anchored
Central bankers concentrate on inflation expectations because they can control them because by their very nature they are something Imagination rather appropriately sang about.
Could it be that… it’s just an illusion?Putting me back in all this confusion?Could it be that. it’s just an illusion, now?Could it be that… it’s just an illusion?
The ECB put forwards the inflation expectation for last year that it would go to 2% and it went to 10%! That is how much use they are in the real world. In fact we can take that deeper because just as there were so many claims that inflation was over in the pandemic when we saw negative oil prices for example. just as the seeds of the inflationary boom were being sown by none other than Christine Lagarde and her colleagues. Indeed using instruments like inflation-linked bonds as a guide has been distorted by all the QE bond buying which rather ironically inflated the inflation-linked bonds creating a boom and bust there which had nothing at all to do with inflation itself. Yet another market distortion was created by our central planners.
The real point is that for central bankers inflation expectations were explained by Humpty Dumpty.
“When I use a word,” Humpty Dumpty said, in rather a scornful tone, “it means just what I choose it to mean—neither more nor less.”
As Alice points out rather presciently for central bankers.
“The question is,” said Alice, “whether you can make words mean so many different things.”
Comment
We are now at the point of what I consider to be the crux issue of our times. Central bankers have engineered one of the biggest wealth transfers ever seen. First they reduced interest-rates in the case of the ECB into negative territory. Then they introduced QE bond buying on a massive scale or trillions of Euros which boosted assets such as bonds explicitly but also house prices and equities.
Already some were worse off via higher house prices which the ECB made sure are nowhere near the inflation figures. For newer readers the Euro area inflation measure ignores owner-occupied housing inflation entirely. Then inflation made workers even worse off as real wages fell. Now the ECB is determined to stop wages exceeding inflation for any form of catch-up let alone growth.
Meanwhile many wealthy asset holders have been able to disappear over the horizon with their central bank driven gains.
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Happy New Year Shaun, I am glad ot have you with us into the 23 Super Shemitah. Of course Christine is crazy, to blame the labour for their own needs. The CB policies have blown bubbles, the Govt pandemic response has destroyed labour supply and SME competition. It is a disaster of their making and they want to blame the remainder of the working population for it.
Outrageous. I suggest a General Strike across the west to unseat all Govts and Quasi Govt Quangos such as the BIS and ECB.
Happy 2023
Quite agree Paul, General Strike (and a return to sound money),as in the 1920’s nothing else will do it, they control both political parties.
It never changes does it?Politicians and central bankers blaming the very victim’s of inflation for the failure of their policies and as Shaun says the result of their policies that result in a massive wealth transfer from workers to the elite.
Slavery has been reintroduced on the QT,except this time it is even worse as the new slaves are responsible for feeding themselves and keeping warm in the winter and the current wages for many fail to do so and they are being cut every year,but they get to vote so it can’t be slavery can it?
Hi Kevin
The technocrats were supposedly brought into the central banks to control inflation. But the mandates were changed and so many were either politicians ( Lagarde) or wannabe politicians ( Draghi). Now they have engineered a wealth transfer that an elected government would never get away with.
Happy New Year Shaun, hopefully a peaceful one, some hope!
Whatever the CBs are ‘independent’ of its not the ruling elite. Once the CB digi currencies are introduced their role as our virtual prison guards will be complete.
Don’t see how we will ever be able to remove the chains once that has happened.
Thank you JW and the same to you.
The central bank digital coins are for one purpose and that is to allow even deeper negative interest-rates. It is something of an irony that it is “The Precious” which stopped interest-rates further into negative territory this time around. Next time around they have different plans for us….
Happy New Year Shaun all the best for the coming year. The question is now who pays? Of course it will be us ordinary plebs as it would be jolly unfair to tax those asset holders probably pleading poverty. The irony is they’d protest that it was their hard work being taxed Unfair!
I have my doubts about how far the ECB can suppress wages as the French will man the barricades sooner rather than later and even the Germans have enough. Interesting times ahead.
Hi bill and the same to you.
For now the ECB seems determined to press ahead with its promised interest-rate increases ( 2 times 0.5%). That will put a squeeze on. Of course we wait to see if they have the same resolve if the Fed drops to 0.25% increases as I expect it too.
Happy new year to you Shaun
I see La-disregards new year resolution is to keep up with the BS 😉
to mis qoute Labour ” Wealth effects for the few , not the many”
Not that they did much for the average working class man/woman when they were in power, choose a colour thats all we have these days.
Forbin
Thank you and the same to you Forbin
A big reason why I steer clear of politics on here is that the political parties are pretty much of a muchness. The establishment has taken charge and any freedom of movement is limited.
The attempts to mislead continue. Below is the woman who described herself as an owl at her first ECB press conference.
“First of all, I would like to say that I am very cautious when it comes to stories about birds. I have had the opportunity to see hawks turn into doves, doves turning into hawks… These are just stories. “
Happy New Year Shaun, and a great start.
It seems CBs can follow Alice and either get lost in the woods or fall down a deep well while still believing in as many as 6 impossible things.
Curiouser and curiouser, said Alice.
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