Beware the temptation to tie everything back to the CPI!



Who was going to tell us just a few months ago that one of the economic problems that we were going to face now would be inflation. After years with the CPI under control, due to the effects of the different crises, Europe and the United States now face strong increases in
that may be temporary, a consequence of the dammed demand during the pandemic, or they may be a serious trouble due to the so-called second-round effects, which we had already forgotten, and which can put the monetary and fiscal authorities in trouble.

According to calculations of the ECB, European inflation could be around 3% by the end of the year, around 4% in countries like Germany, where a greater economic pull is expected. In 2021 the average price increase would be around 1.9%, and in 2022 it would fall to 1.5%. In this stage monetary policy it would remain lax, as is now planned, and would continue to be the main prop for recovery. But they exist risks of prices rising much more than is anticipated, and then the monetary authorities will have to start considering the withdrawal of stimuli; interest rates may rise earlier than expected; and some especially indebted countries, such as
, they may have problems.

It is clear that in the coming quarters all European countries, including ours, will register very strong growth. The Bank of Spain itself raised its growth forecasts this week to place them at 6.2% this year and the next 5.8%. The boost that the billions of dollars in investment will cause European funds, low interest rates and the family savings During the pandemic, which once the restrictions are lifted, spending will skyrocket, justify these good growth prospects for the EU economies. But all this is not without risks, especially in countries like Spain, where the coalition government of socialists and populists may be tempted to apply measures that lead the country to a new inflationary spiral, something that we had forgotten for years.

And I mean that in recent years the different governments, with the complicity of the social agents, have been taking measures to undo the so-called indexation of the economy. Since it broke out The financial crisis little by little the executives bet on decoupling public and private salaries and pensions from inflation. Experience had shown that linking the rise in wages and pensions to the CPI translated into more price increases, which was known as second round effects, causing a perverse impact on the economy. But since Sanchez settled in Moncloa has been taking steps in the opposite direction. The pension revaluation index, approved by the Rajoy Executive, which linked the increases in pensions to the health of the system, GDP and prices, has now passed away, and the pensions –By the agreement of the parties in the Toledo Pact– they are linked to the IPC again. And with public salaries, the same can happen. And that can also have a dragging effect on the private sector, where the salary review clauses linked to the CPI are practically non-existent in the agreements.

European governments, including Sánchez's, must be especially careful to avoid those dreaded second-round effects. If they fall into the temptation to tie everything back to the CPI, we can enter an inflationary spiral that forces the ECB to withdraw stimulus and raise rates. And that would have
very negative for recovery.

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