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📝 Natixis: Three Scenarios On The Decline of Purchasing Power

1. Scenario 1: Public transfer payments

In this first scenario, wage growth remains low and inflation remains high.

Wage earners therefore do not obtain any improvement in their bargaining power, and monetary policy does not combat inflation effectively. In this first scenario, purchasing power is supported by public transfer payments to households. This is the case in France for example, where the government has financed a cap on energy prices. This explains why inflation is lower in France than in the rest of the eurozone

2. Scenario 2: Restrictive monetary policy

In a second scenario, wage growth remains low, but central banks drive down inflation with a sufficiently restrictive monetary policy.

It is therefore a fall in inflation obtained thanks to higher interest rates that gives purchasing power back to wage earners.

The Federal Reserve in the United States has signalled that it will pursue this strategy. The problem with this strategy is that to obtain a significant fall in inflation, it requires a markedly higher rise in interest rates than is currently expected

3. Scenario 3: Wage re-indexation

In this third scenario: inflation remains high as monetary policy remains not very restrictive, and purchasing power is protected by a re-indexation of wages to prices (which has already occurred somewhat in the United States, Charts 1A and B; and could occur later in the year in the euro zone), The risk with this strategy is clear: if wages track prices perfectly and if prices track labour costs perfectly: equilibrium inflation after an inflationary shock becomes very high, as was seen in the early 1930s

- Natixis Economic Research



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