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Wolfgang Münchau on inflation

In his FT column, Wolfgang Münchau asks the question whether German is overheating, and its implications on ECB policy, and eurozone stability. He says the monoculture of Germany's economy, combined with low unemployment at the start of the economic cycle have already led to severe labour shortages, putting pressure on wages. He expects big wage rise this year, which will start to affects average labour costs next year. Combined with rising energy prices, a significant build-up of inflationary pressures is likely. The ECB will probably decide to increase interest rates relatively soon. Delaying the rate increase would trigger corrective action later, with interest rates rising to the high single digits, and jeopardise the recovery of the banking sectors in Spain, and even Germany. His conclusion that an inflation target of less than 2 per cent is too tough for a monetary union like the eurozone.

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman
by Migeru (migeru at eurotrib dot com) on Mon Jan 31st, 2011 at 09:18:24 AM EST
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