Wages | Olli Rehn warns of a spiral fueling inflation if wages are raised

According to the CEO of the Bank of Finland, Olli Rehn, the increase in wages plays a key role in the development of inflation in the long term.

Bank of Finland director general Olli Rehn warns of the likely acceleration of inflation if it is decided to increase workers’ wages too much during the autumn negotiation rounds. Rehn spoke at the government’s budget meeting at Säätytalo on Wednesday.

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Rehn said that he understands the wishes for salary increases during inflation. In Finland, inflation rose to 7.8 percent in July, which is the most then the 1980s. According to Statistics Finland, the price of food in August was 12 percent more expensive than in August of the previous year.

“Wage expenses are, however, transmitted back to prices, and the risk is a cycle of prices and wages fueling inflation,” said Rehn.

According to him the development of wage inflation is key in the long term. Rehn believes that moderate wage inflation would keep Finland competitive in relation to competitor countries now that many companies are looking for replacements for the lost Russian market.

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“But if the situation turns into a wage competition, like before the financial crisis, competitiveness can be lost quickly, especially in a sensitive economic situation,” Rehn said in his speech.

Rehn says that in the forecast made by the Bank of Finland in June, the risks to economic development were assessed as a stronger braking of the international economy, a higher than predicted rise in energy prices, greater problems in production chains and a weakening of consumer confidence.

“Unfortunately, it must be stated that a large part of the assumptions of the calculation has already been realized during the summer. The war seems to slow down growth and accelerate inflation more than the basic June forecast.”

The previous ones during the weeks, the price of energy in particular has been emphasized in the economic discussion, and also the new electricity contracts that exchange electricity prices have risen to record highs in Finland.

Rehn says in his speech that the International Monetary Fund (IMF) has reminded that governments should allow energy purchase prices to be passed on to consumer prices. Higher prices would encourage consumers to conserve scarce resources.

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Prime minister Sanna Marin (sd) commented in the government’s budget tussle that started on Wednesday that extraordinary means must be introduced to deal with the energy crisis. According to Marin, there are no major differences of opinion on this within the government.

According to Rehn, the effect of the rise in electricity prices should be balanced by “well-targeted and temporary measures for households in the most vulnerable position”. Rehn has not said what actions he thinks should be preferred.

For example, professor emeritus of economics at Aalto University Matti Pohjola has stated that subsidies aimed at low- and middle-income earners would be the “best policy” now.

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Rehn in his speech, he also stressed the reduction of the public finance deficit, as, among other things, the structural deficit, growing interest expenses and the growth pressure of age-related expenses increase the debt ratio even more.

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“The problem is not so much the amount of public debt in relation to the size of our economy, but the direction of the debt. The structural deficit, growing interest expenses and the pressure to increase age-related expenses will increase the debt ratio in the future.”

According to Rehn, reaching a balance does not happen by itself, but requires decisions from the government that support it. The Treasury minister Annika Saarikon (mid) presented by the Ministry of Finance at the beginning of August budget proposal there is a 6.3 billion euro deficit for next year. The state budget for 2022 agreed in autumn 2021 was 6.9 billion euros deficit.

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