Professor Casper de Vries sheds his light on the high inflation at the request of the Dutch Lower House

Inflation

The Professor reasoned that it is true that the current inflation is mainly due to the erupting energy prices. However, he also stressed that the rising inflation already started with the quick recovery after the COVID-pandemic. Logistical disturbances and a shortage of energy have kickstarted the current inflation. The current fear of de Vries is that these energy prices may remain so high. This will have a detrimental effect on the economy’s capacity to recover.

Monetary options

From a monetary perspective, there is not much the European Central Bank (ECB) can do. The high inflation we are now facing is for the most part imported with foreign energy. If the ECB tries to tackle this issue, this may lead to the sceneries we saw in the 1970s, where we had a stagnating economy paired with high inflation. De Vries stresses that we should also keep other dynamics in mind when assessing monetary policy. Such as the high inflation in the eurozone, divergent interest rates between eurozone countries and the high-interest rate in the United States.

Budgetary options

The Professor stresses that we should accept the reality that we have collectively become poorer than before, it is therefore not possible to compensate everyone in society. However, it is possible to redistribute the burden of this high inflation among different groups in society. For instance, if the government wants to compensate the most affected groups in society, it should raise the tax burden on the least affected group, and compensate the most affected groups with the additional tax revenues.