Danish National Bank Governor Lars Rohde has stated that the Nordic country's economy is threatened by a “vicious spiral” due to “dangerous cocktail” of rising prices on staples from bread to petrol and electricity, as well as higher wages.
According to Rohde, it is necessary for the nation to tighten fiscal policy. Unless the parliament puts a damper on the economy, it is bound to get worse, he said. Rohde estimated that total demand must be slashed by around 1 percent of the GDP.
“If demand is not limited, there is an imminent danger that we will get what we fear most: a wage and price spiral”, Rohde said, as quoted by TV2.
Rising prices lead to higher wages, which, in turn, spurs even higher prices and thus even more inflation.
According to Rohde, the sooner the tightening of the fiscal policy is announced, the better. This, he ventured, would put the pressure off the labor market.
If high inflation and rising wages come to stay, the Danish economy could face a severe economic downturn, he warned.
“It will have a very negative effect if inflation and wage growth rates remain high. But the period when you want to knock inflation down again – once it has taken hold – is painful and will probably be associated with a sharp recession”, Lars Rohde concluded.
According to Statistics Denmark, consumer prices in May were 7.4 percent higher than they were a year previously, which is the highest 12-month inflation recorded in nearly four decades, since 1983.
Denmark's Nordic peers have landed in similar situations and are also witnessing levels of inflation unseen in decades. Swedish Finance Minister Damberg warned that tough times are ahead for the Swedish economy, with growth expected to slow down in the second half of the year, due to high inflation and rising interest rates.