The real question for the euro zone is inflation at the end of 2022

Inflation in the euro zone is set to peak at a very high level, probably around 8%, in the spring of 2022 due to the consequences of the COVID crisis and the war in Ukraine. But the real question is not how high inflation peaks, even though it will sharply reduce wage earners’ purchasing power, but rather how much inflation there will still be at the end of 2022: Before the war in Ukraine, it was thought that inflation would be around 2%. This allowed the ECB to justify keeping its monetary policy highly expansionary, including in 2023. The situation for the central bank will become very different if inflation is significantly higher than 2% at the end of 2022; Wage agreements in 2022 have been signed on the basis of expected inflation of 2% at the end of the year; wages were negotiated to increase by 2.5%. If inflation at the end of the year is significantly higher than 2%, wage earners will demand compensatory wage increases in 2023 and inflation will become permanent.