Spain | Incomes policy agreement, imported inflation and pensions

Summary

It seems reasonable that in exceptional times, like the current one, the economic cost of the major increase in gas, oil and other commodity prices should be shared across the population as a whole — including pensioners. This would then help to reduce the risk of inflationary spirals and of future stagflation.

Key points

• Key points:
• When the rise in energy prices results from imports, it seems clear that most of the spike in the CPI results from a problem of imported inflation.
• To avoid any escalation of social conflicts, the ideal situation would be to agree the broadest possible incomes policy, that avoided the costly struggle between economic agents who try to pass on the costs of higher inflation to each other, with the aim of maintaining their own purchasing power as far as they possibly can.
• All additional expenditure on pensions above the level of wage growth is consolidated, reduces the fiscal room for maneuver of other government policies and could complicate the agreement of an incomes policy, unless its cost is made clear and society as a whole is prepared to voluntarily accept a greater part of the burden.
• In the absence of an incomes policy agreement, redistributive conflicts can raise the cost of the crisis embedding inflation through second-round effects; thereby creating wage-price spirals, and dragging down employment and investment.

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