DNB therefore calls on everyone to moderate and thus put on the inflation spectrum. Previously, DNB chairman Klaas Knot called on unions to take it easy on wage demands to avoid a wage-price spiral, now DNB also calls on employers to be careful with price hikes and the government with spending .
interest
In this way, DNB hopes to avoid further increases in inflation. The central bank actually wants to avoid having to use the interest rate weapon to achieve this. “What I read between the lines is that De Nederlandsche Bank is really afraid that inflation will stay high for a long time and more stubbornly.” The use of the interest rate weapon would mean that the economy would experience a sharp recession.
When asked which of the four parties leads in the economic dynamics of wages, prices and government spending, Jacobs says that government, employers, the central bank and employees are constantly interacting.
Hague panic
When Russia invaded Ukraine, inflation skyrocketed as energy and food prices soared. According to Jacobs, The Hague panicked and the government began handing out money to compensate people. “In doing so, the government assumed a very large part of the inevitable loss of purchasing power.” Nice for families, but disastrous for the economy because it has increased the demand in the economy.
‘Politics was very blurry, money ran out even with people not getting into trouble right away. And that’s given the economy a boost,’ Jacobs says. According to the professor, this is the first component of inflation. The second is made up of companies that have raised prices sharply in recent months, followed by wages.
Jacobs points out that a loss of purchasing power is inherent in the situation that has arisen and that it will be very difficult to keep inflation under control if each side makes the other party bear the consequences of that loss. DNB also warns against this in less and less veiled terms: ‘government, don’t spend too much’.
More demand than supply
Jacobs reports a sharply deteriorating structural fiscal balance, something the economy cannot exploit right now. ‘We currently have much more demand than supply in the economy. We try to buy more than we can produce.’ As a result, inflation is on the rise and labor market strain is increasing. Jacobs cautions: If the government continues to drive demand in that economy with very accommodative fiscal policy, it will be much more difficult for the central bank to control inflation.
Incidentally, financial markets are much less negative about economic developments. According to Jacobs, financial markets believe that the central bank is able to limit inflation to its target. So 6 to 2 percent. DNB chief Knot is less optimistic about declining inflation than the financial markets.