Philip R. Lane: Interview with Financial Times

INTERVIEW

Interview with Financial Times

Interview with Philip R. Lane, Member of the Executive Board of the ECB, conducted by Martin Arnold on 27 January, and published on 2 February 2020

• When you listen to economists and you read what people are saying about it, you get multiple explanations.
• First and foremost, there has been a big macro shock that has seen the economy operating below potential.
• Thinking about the cycle in Europe compared with the United States: that double crisis is relevant for why it's more delayed here.
• But, after a long period of time, we have had wage inflation now for a couple of years.
• Services inflation is in the high ones now, so it's not the case that services inflation is dead.
• The fraction of the price level which is most likely to be influenced by wage pressures is moving closer towards the target.
• The price level of goods which is just over half the price index is still closer to zero than to the target.
• The difference has been a long-running phenomenon, because the scope of productivity increases is much less in services than in manufacturing.
• The global influences on inflation that come through commodities and goods prices are much less evident in services.
• Wages are going up in the goods sector, in manufacturing as well as in services?
• Looking at the markets, many services sectors are made up of smaller firms, which are more competitive.
• So a firm may wish to raise prices, but they feel that the current market conditions are not favourable.
• Think of sectors like electronics, cars and so on, where there is a fairly small number of global firms.
• Yes, but if there's a small number of global firms, they have more pricing power.
• To a degree you can segment pricing, you can differentiate pricing strategies across the different continental markets.
• Goods are generally more global in terms of competition, whereas services are more domestic and local.
• The cost structures in many goods industries have perhaps become a lot more common because firms are globally sourcing inputs.
• They might have designers in Europe, IP originators in the United States, and assembling of goods in Asia or central and Eastern Europe.
• In those conditions of uncertainty there may be less appetite than normal for taking risks by raising prices or squeezing demand.
• The second is cost pressures: upstream, for example, the dynamics of commodity prices, such as energy prices, or other commodities.
• Thats backed-up by the Non-financial business sector dialogue, which is a roundtable with big corporates and the Governing Council.
• The nature of the global economy is quite different now because we now have a much greater contribution from emerging markets.
• Historically, there was always a nice clean separation, which is that supply is just driven by technology, by innovation, by demography.
• If more people spent the last six years unemployed than employed, that would Youre talking about 11 million people...
• So your overall message is basically that its working; monetary policy is working, you believe it has an effect.