ECB President Christine Lagarde took European firms to task Friday over their failure to take any hit to their profit margins as the euro area battled with high inflation. File photo by Erik S. Lesse/EPA-EFE
July 7 (UPI) -- European Central Bank President Christine Lagarde has warned companies that the bank would not stand back and do nothing in the face of twin inflationary increases in profit margins and wages.
Businesses had failed to help tackle recent high inflation in the eurozone by absorbing high costs into their bottom line -- with some leveraging shortages to boost margins -- at a time when wages were rising at an unexpectedly rapid pace, Lagarde said in a newspaper interview published Friday.
Lagarde urged firms to instead meet employees' calls for higher wages from their profit margins.
"The recent period of high inflation was not accompanied by a reduction in firms' profit margins, which even increased in some cases -- particularly when demand for goods and services outstripped supply. At the same time, wages have also risen by more than expected," she said.
"In the current context, it is important to know whether firms are going to reduce their margins a little to meet their employees' expectations of higher wages and to restore some of their purchasing power, which is what has normally happened during previous high inflation episodes, or whether we are going to see a twofold increase -- in margins and in wages.
"A simultaneous increase in both would fuel inflation risks, and we would not stand idly by in the face of such risks," said Lagarde without specifying the action the ECB would take.
Acknowledging the competing imperatives of controlling inflation and economic growth, Lagarde said Inflation in the 20 countries that use the euro was, however, now headed in the right direction halving from double digits in October, largely due to falls in commodity and energy prices and the positive impact on prices of interest rate rises by the bank.
The ECB began hiking rates for the first time in 11 years last summer as inflation soared to more than four times the bank's 2% target.
"Food prices are also rising at a slower pace. But inflation is still higher than our medium-term target of 2% and according to our staff projections, is set to remain so in 2024 and 2025. We therefore still have work to do to bring it back down and reach our target," Lagarde said.
The euro area economy would expand by around 0.9% in 2023 despite non-existent growth so far -- 0.1% in the April-June quarter and zero in the first quarter -- but the bank sees a "return to potential growth over the period 2024-25."
Consumer inflation in the euro area fell to 5.5% in June from 6.1% in May, largely because of a sharp fall in energy prices and slowdowns in the rate at which food, non-energy industrial goods and services prices rose, according the Eurostat.
Energy prices fell for the second straight month, down 5.6% compared with a 1.8% fall in May while food alcohol and tobacco prices growth came in at 11.7% compared with 12.5% in May, followed by non-energy industrial goods, which slowed from 5.8% in May to 5.5%.
