What is Danmarks Nationalbank doing to keep inflation stable and low?
One of Danmarks Nationalbank’s overall objectives is to help ensure price stability by maintaining a fixed krone exchange rate against the euro. The European Central Bank wants to keep inflation in the euro area close to 2 per cent over the medium term. The fixed exchange rate policy ensures that we import low and stable inflation from the euro area over the medium term.
High inflation erodes purchasing power. Can the problem be solved by allowing wages to rise as much as inflation?
Historically, allowing wages to automatically rise as much as inflation has only caused problems. This was evident in the 1970s, which were characterised by a negative price-wage spiral: Wages increased substantially, but the increases in income were eaten away by higher inflation. The negative developments in the 1970s go some way towards explaining the central banks’ stated objective of ensuring stable, low inflation over the medium term. At the moment, prices are rising more than wages, but the opposite has actually been the case for a number of years in Denmark.