The European Central Bank (ECB) recently raised interest rates to 0.5%. Federal Reserve at 2.5%. While the ECB aims to bring inflation down, it is not clear how and when this will be achieved. The ECB needs to take a number of mistakes seriously in order to develop the right strategy to combat demand-pull and input-cost inflation.

a) Failure to analyze real data: in the past, money printing, as well as loans, even if they were made in excess, for the most part did not enter the real economy, but were directed to various forms of investment (stocks, real estate, cryptocurrencies, etc.). ) .), as a result of which they do not directly create consumer goods inflation.

In the world, central banks “printed” more than 8 trillion. dollars, which, unlike in the past, financed a government deficit that soared to unsustainable heights, and also increased public debt to 75% of global GDP. But this money entered the real economy through subsidies etc. and created consumer demand inflation long before Russia invaded Ukraine. The increase in energy prices has occurred since 2021 due to the huge demand for natural gas due to the lack of planning in the transition to green energy, since the volumes of energy withdrawn were covered mainly not by renewable sources, but by natural gas. At the same time, there is inflation in the cost of production, which was created mainly due to high energy prices and the lack of investment in oil and gas production, which could increase production.

The European Central Bank must understand that the increase in supply today plays an important role in lowering prices. Until the facts are taken into account, inflation and growth forecasts will not work.

b) Forecast error: Initial predictions that inflation was caused by the pandemic and would recover after the supply chain reopened have been debunked. Such predictions were quickly and correctly dismissed as unrealistic. Even more important are the disruptions in growth forecasts, with many economies showing signs of slowing growth and could soon face recession.

The Great Depression of the 1970s ended disastrously, raising interest rates to 20% in 1981, causing a recession and double-digit unemployment.

c) Lack of response: the EU has taught us to reform only after a crisis has arisen and after we “feel” its adverse effects. Retrospective intervention generates anti-European sentiments, undermines the cohesion of states and the international role of the EU. Nobody needs administrative mechanisms that do not respond quickly and intelligently. The belated rise in interest rates relative to other economies carries the risk that it will now be too late to tame at least demand-driven inflation due to excess money supply. Once the post-pandemic post-pandemic inflation stance has been dropped, more aggressive action must be taken.

d) Communication Failure: The ECB needs to be simpler and clearer in its communications, clearly outlining the path it will take to tame inflation on both the demand and input side. As part of its policy planning, it must evaluate and communicate various options for withdrawing the excess liquidity it has without causing a significant slowdown or recession in its economy.

Failure to address the above shortcomings will rob the ECB of the credibility needed to function as an institution that can cope with the recovery from the pandemic, reducing inequality, avoiding pressure on the bonds of over-indebted countries, including our country. The lack of measures to increase production, mainly in the energy sector, to curb the growth of production costs and production costs will lead to stagflation, weaken demand in 2024, create unemployment, damage the profitability of enterprises, as a result of which they will not make new investments, at the same time when production should be increased by increasing investment. Less supply of goods will lead to higher prices for both energy and food. Low-income groups will be the hardest hit and the first to react because inflation redistributes income to the detriment of poorer groups.

In the early 1970s, inflation was underestimated and not controlled in time by the US Federal Reserve. The situation became more complicated in 1973, when the Arab oil embargo led to a sharp increase in energy prices and general inflation. Even when he raised interest rates, pushing the economy into a severe recession in 1974-75, inflation and unemployment did not fall to the levels of the previous decade. The stagflation of the 1970s ended disastrously, raising interest rates to 20% in 1981, causing a recession and double-digit unemployment.

* Mr. Giorgos Atsalakis is Associate Professor at the Laboratory for Data Analysis and Forecasting at the Technical University of Crete.