Inflation, as a monetary phenomenon, is treated with measures to limit the amount of money in the economy. Measures that have an impact on growth and affect lower-income households.
The increase in interest rates by central banks is aimed at reducing the money circulating in the economy so that this reduction will cause a reduction in demand and lead to a reduction in prices.
The problem with existing particularly strong inflationary pressures is that they are caused by energy prices. An increase in interest rates will not cause a reduction in energy prices unless there is a vertical reduction in energy demand, possibly remote. This does not mean that monetary authorities will be left alone. The ECB is preparing to follow the example of other major central banks (in the US, UK) and will raise interest rates. Inaction is not an option as there is a risk that inflation will get out of control. We are seeing what is happening in Turkey and the occupied territories where the failure to take measures to reduce inflation in recent years has led to unprecedented levels of price increases.
Where we are today, the necessary measures to curb inflation will hurt growth. IMF Managing Director Kristalina Georgieva told Reuters that it was becoming increasingly difficult for central banks to drive down inflation without causing a recession due to rising energy and food prices in Ukraine. China's anti-pandemic policies that have hit production with lockdowns, and the need to rearrange supply chains to make them more resilient.
What makes it more difficult to curb inflation is that rising energy prices are hurting the middle class, significantly eroding its purchasing power. Everyone is calling for supportive measures and it is important that the middle class does not surrender to the forces of populism. Households must be protected from the risk of impoverishment. However, there must be a hierarchy of support as not everyone is affected equally.
An interesting study in Greece, by Piraeus Bank, entitled “Impact of energy and food prices on households and businesses” showed that lower-income households “feel” more the pressure of inflation.
In particular, inflation for households with a monthly income of up to € 750 had already reached 10.6%, in households with income € 751- € 1,100 at 11.1% while in more affluent households with incomes of € 2,800- € 3,500 it is limited to 9.5% and in households with an income above € 3,500 to 8.5%.
Horizontal measures are attractive to the public, but that does not mean they are fair. In Cyprus, too, we must lower the numbers and bravely support those at risk of poverty.