Raising interest rates is “costly and ineffective” in tackling the profit-driven inflation and instead punishes working people and prevents climate action, a new European Parliament study has found.
The European Central Bank (ECB) raised interest rates to record levels last year in response to inflation and only began to bring rates down again earlier this month.
The new study by two leading economists, Isabella Weber and Jens van 't Klooster, for the Parliament’s economy committee supports trade union arguments that the ECB have failed to tackle the root cause of inflation and needlessly inflicted more pain on working people.
It concludes that in future the EU should coordinate measures to prevent shocks caused by sellers’ inflation, which include the use of windfall taxes and price caps – both policies which the ETUC advocated for as part of its campaign on the cost-of-living crisis.
The main findings of the report, “Closing the EU’s inflation governance gap”, are:
- “The post COVID-19 pandemic inflation was different, with cost shocks that made profits rather than wages the main driver of inflation.”
- “Unit profits accounted for half or more of inflation in 2021-2023 as the analysis of the IMF (2023) and the ECB (2024b) demonstrate. Meanwhile, at the peak of inflation in the third quarter of 2022, real wages in Europe saw a record decline of an average of 5.1 per cent year-on-year.”
- “Monetary policy does little to stop sellers’ inflation, especially when firms prioritise price increases over volumes. Households also experience the direct impact of higher mortgage rates on their disposable income, further raising their cost of living.”
- “Using monetary policy to deal with shocks harms exactly those [clean energy] investments most needed to protect the European economy against future shocks.”
- “Competition policy to address price gouging and taxes on windfall profits to stop the proliferation and amplification of shocks should be implemented by the Commission and national competition authorities.”
Responding to the report’s findings, ETUC General Secretary Esther Lynch said:
“This report shows once again why it was wrong to make working people pay for an inflation crisis caused by corporate greed.
“Raising interest rates to record levels has further squeezed working people already suffering a huge drop in living standards and made it impossible for many firms to borrow to invest in the future.
“But they have been proved to be very costly in tackling what the ECB’s own data shows was the root cause of inflation: the shameless use of supply chain shortages to super charge their profits.
“The ECB now has a responsibility to keep cutting rates quickly in order to relieve the pressure they’ve put on working people and unblock investment in the economy.
“Policymakers must ensure this discredited strategy is replaced with the tools needed to effectively tackle future inflation shocks like windfall taxes and price caps.”
