Why is inflation high at the moment?
There are several reasons for the high level of inflation we are seeing at the moment: One reason is that the lockdowns during the covid-19 pandemic were followed by a surge in demand for goods such as furniture and flat screens. Due to the lockdowns and disruptions to the global supply chains, the supply of many goods could not keep up with the increase in demand. In a situation where demand outpaces supply, prices in the world market will naturally increase. Supply chains may, for example, be affected by closed ports or by subcontractors who cannot supply the components needed by manufacturers elsewhere in the world.
Another reason is that many governments and central banks have introduced measures designed to stimulate the economy. Especially the US economy has been strongly stimulated by, for example, direct cash payments to citizens, which boosted private consumption and thus contributed to rising prices.
Finally, the Russian invasion of Ukraine has led to further increases in the prices of energy, food and metals, in particular.
What is Danmarks Nationalbank doing to keep inflation stable and low?
One of Danmarks Nationalbank’s overall objectives is to help ensure price stability by maintaining a fixed krone exchange rate against the euro. The European Central Bank wants to keep inflation in the euro area close to 2 per cent over the medium term. The fixed exchange rate policy ensures that we import low and stable inflation from the euro area over the medium term.
When will inflation start falling again?
One of Danmarks Nationalbank’s overall objectives is to help ensure price stability by maintaining a fixed krone exchange rate against the euro. The fixed exchange rate policy has provided a framework for low and stable inflation expectations in Denmark. This has translated into relatively moderate increases in the private sector’s inflation expectations. In other words, there is confidence that the central banks will be able to rein in inflation within a manageable time frame.
High inflation erodes purchasing power. Can the problem be solved by allowing wages to rise as much as inflation?
Historically, allowing wages to automatically rise as much as inflation has only caused problems. This was evident in the 1970s, which were characterised by a negative price-wage spiral: Wages increased substantially, but the increases in income were eaten away by higher inflation. The negative developments in the 1970s go some way towards explaining the central banks’ stated objective of ensuring stable, low inflation over the medium term. At the moment, prices are rising more than wages, but the opposite has actually been the case for a number of years in Denmark.