Casper de Vries, Professor of Monetary Economics at Erasmus School of Economics, was invited to participate in the economists' panel by BNR Newsradio (August 1, 2022). De Vries shed his light on July’s staggering inflation level, the state of the American economy, and whether there are limits to pursuing economic growth.
The Professor explains that the inflation of 11,6% percent should be nuanced a bit, since the inflation is based on the price level of the previous years and not on the previous month. This is important to realise, since the inflation started to rise after July 2021. From a mathematical perspective, this would mean that the inflation will start to decrease in the coming months.
Wage price spiral
De Vries does not expect a wage-price spiral in the Netherlands. The inflation in the eurozone is mainly caused by ‘imported’ inflation, i.e., caused by higher imported material prices, employees’ associations realise this. This is viewable in the data as well, the latest wage demands were well below 5%.
Federal Reserve and ECB
Different from the eurozone, the United States is experiencing inflation mainly caused by budgetary expansion, the Professor reasons. He illustrates that, on average, each American received almost 3.000 USD from the government during and after the COVID-pandemic. This is also the reason why the Federal Reserve is firmly raising the interest rate on the dollar. The European Central Bank is unable to raise the interest rate so firmly, since our inflation is caused outside of our own economy. Therefore, raising the interest rate in the Eurozone will not lead to a noticeable reduction of the inflation.
Should we continue pursuing economic growth?
De Vries does not expect a stop of economic growth. Each generation of humans strived to increase their well being relative to the previous generation. Alternatively, he expects another way of economic growth to occur rather than the current way in which we pursue economic growth; by becoming more aware of the planetary boundaries. Once polluting goods and nonpolluting goods become respectively more expensive and cheaper, new incentives will make way for economic growth.