A very important question for the euro zone: Is companies’ lack of pricing power cyclical or structural?

Euro-zone companies are unable to pass increases in their production costs onto their prices: they have no pricing power. This explains why core inflation is only 1% while unit labour costs are rising by more than 2% per year in the euro zone: if euro-zone companies had pricing power, core inflation in the euro zone would have returned to the ECB’s inflation target of 2%. We can then see two possible explanations: If euro-zone companies’ lack of pricing power is cyclical, stimulating domestic demand in the euro zone could restore companies’ pricing power, leading to a rise in inflation that would drive the ECB to hike its interest rates; But if euro-zone companies’ lack of pricing power is structural, caused by the intensity of competition and a low level of product sophistication, then euro-zone inflation will remain low and the ECB will keep zero or negative interest rates. As the lack of pricing power can be seen only during recessions and since the start of 2018, it is difficult to believe that it is a structural characteristic.