ECB’s Mersch Says Oil Must Not Boost Other Prices

by Simone Meier

(Bloomberg) European Central Bank council member Yves Mersch said a surge in oil prices must not be allowed to lead to permanently faster inflation, Luxembourg’s Wort newspaper reported, citing an interview.

Yes, that is the mainstream view – don’t turn a relative value story into an inflation story.

“Of course we can do something against” faster inflation, Mersch, who is also governor of Luxembourg’s central bank, said in the interview, according to Wort. “We have to prevent temporary price increases, as we see with oil, from permanently impacting on the overall level of prices.”

It already has started to do this via biofuels and increased costs of production. Food prices are up, and other prices are facing upward pressure.

Rising oil prices are “like a tax,” Mersch told the newspaper. “If someone is taxing us, we all become poorer. If we refuse to become poorer, we’re not creating any purchasing power but only inflation,” the newspaper quoted him as saying.

Yes by keeping it a relative value story by limiting demand, real terms of trade deteriorate making the nation ‘poorer’.

“We have to watch out that other sectors and services don’t become infected” by rising prices, Mersch said, according to Wort.

Demand has to be kept low enough to not let a relative value story become an inflation story.

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