The Governor of the Bank of Finland warns of a serious economic disruption

Stagflation refers to slow economic growth and high unemployment as well as constantly rising consumer prices.

In September, the ECB estimated that the euro area economy could contract by 0.9 percent in 2023 if stops selling natural gas and oil transported by sea to Europe and Europe does not find alternative sources of supply. The forecast is also based on the assumption that uncertainty and raw material prices will remain high, trade will shrink and financial conditions will weaken compared to the basic forecast.

“At the moment, the biggest problem is too high . We have both a driver and an anchor [for inflation]: energy is the key driver of eurozone inflation, while moderate wage inflation acts as an anchor,” Rehn said.

Central banks have sought to curb inflation by tightening , which slows economic growth as businesses respond to rising borrowing costs by reducing investment and households by curbing spending.

Euro area inflation accelerated to 10 percent in September.

The ECB raised its reference by 0.5 percentage points in July and by 0.75 percentage points in September. Its governing board announced early last month that benchmark interest rates should be raised further, leaving financial markets confident that another 0.75 increase will be announced at the end of October.

Rehn said the should move forward on its tightening path to keep inflation expectations close to the 2 percent target over the medium term.

Jan von Gerich’s chief analyst told last week that the risk of stagflation has clearly increased in the euro area partly due to the actions of the ECB.

“The tightening of monetary policy, together with the energy , is one of the reasons for the slowdown in economic growth, but on the other hand, inflation must be brought under control. It remains to be seen to what extent unemployment falling within the definition of stagflation will rise in the euro area,” he said.

Last week, the (IMF) encouraged central banks to focus firmly and decisively on curbing inflation.

“Almost everywhere, rapidly rising prices, especially for food and energy, are causing serious hardship for households, especially the poor,” wrote Pierre-Olivier GourinchasIMF Chief Economist.

Aleksi Teivainen – HT

Source: The Nordic Page

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