Inflation Completes Double Whammy for Europe’s Covid-Hit Workers
Inflation is dealing a fresh blow to the low-income workers whose finances fared worst when Covid-19 swept across Europe.
Many toward the bottom of the pay scale burned through savings as lockdown-induced furlough programs only partially covered their wages. Now, soaring energy and food costs are swallowing a disproportionate chunk of earnings to complete a double whammy.
Their plight stands in contrast to wealthier white-collar employees who squirreled away cash after swapping the office for home, aren’t so sensitive to swings in power prices and benefited as property and stock markets surged during the economic recovery.
The widening gap between the two groups -- a major legacy of the coronavirus crisis -- is a growing headache for euro-area policy makers.
Germany’s next government has committed to tackling unequal income distribution, while France has earmarked hundreds of millions of euros to help poor households cope with high electricity bills. Inequality considerations could be incorporated into decision-making at the European Central Bank, according to Executive Board member Isabel Schnabel.
The current squeeze on low-income households “is a very serious issue,” said Holger Schmieding, chief economist at Berenberg. While taming inflation is typically up to central banks, he said “this isn’t a matter for the ECB to do anything about at the moment -- it’s a matter for governments to offer relief.”
Calls for action are only likely to grow louder. Even before the pandemic erupted, inequality was perceived to be too large, according to a report published Thursday by the Organization for Economic Cooperation and Development.
“Most people in most countries are strenuously calling for greater equality of economic outcome and opportunity,” the Paris-based group said.
The OECD found people generally favor re-distributive fiscal policies -- meaning governments may face enduring pressure to act, even after inflation dies down.
Right now, it’s the path for prices -- currently rising at the fastest pace since 2008 in the euro region -- that’s under the spotlight.
The continent’s less well off tend to be more worried about inflation than higher-earners, according to European Commission survey data, with poorer households spending more of their incomes on the essentials where costs are currently surging.
In Italy, for instance, the price of tomatoes jumped 12% from a year ago in October, while increases for other food staples like pasta and olive oil are also outpacing headline inflation.
While conceding that the process is taking longer than anticipated, ECB President Christine Lagarde says price pressures will abate in 2022. But upside risks remain: supply chains, for one, could continue to see disruptions as ocean-freight rates stay elevated.
The debate is already widening.
Like other central banks, the ECB has been accused of contributing to rising inequality through quantitative easing. The ECB’s Schnabel said this month that “there is a risk that monetary policy may disproportionately benefit those in the higher ranks of the wealth distribution.”
ECB officials are set to review their asset-purchase programs in December.
Erik Nielsen, chief economist at UniCredit SpA, said that while European income-distribution measures haven’t deteriorated as much as those in the U.S. and the U.K. in the last 10 or 20 years, the issue of inequality isn’t going anywhere.
“It’s more about a political feeling of fairness in life than anything else,” he said.
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