Economy

Euro zone inflation to stay high for longer than predicted, Lagarde says

ECB had banked on a rapid decline in inflation next year

Christine Lagarde, president of the European Central Bank. Photograph: Valeria Mongelli/Bloomberg

Mon Nov 15 2021 - 11:17

Persistent supply chain bottlenecks and soaring energy costs are slowing euro zone growth and will keep inflation high for even longer than had been thought, European Central Bank president Christine Lagarde said on Monday.

The ECB has banked on a rapid decline in inflation next year but policymakers are now openly admitting that their forecasts, already revised up several times, are still too low, as stress in the global economy takes a toll.

But Ms Lagarde continued to push back on calls and market bets for tighter policy, repeating the ECB’s message that conditions for higher interest rates are unlikely to be met next year as inflation is still seen back below the bank’s 2 per cent target further out.

“Shortages of materials, equipment and labour are weighing on manufacturing production, weakening the near-term outlook,” she told a hearing of the European Parliament’s committee on economic affairs.

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Inflation hit 4.1 per cent last month and could approach levels near 4.5 per cent by the end of the year, before a slow decline that will put it back under the ECB’s target only towards the end of 2022, economists predict.

Energy fall

Ms Lagarde added that the bottlenecks were likely to ease next year and energy futures also point to a noticeable fall next year, suggesting that inflation will fall, even if a normalisation in prices takes longer.

“We still see inflation moderating in the next year, but it will take longer to decline than originally expected,” Ms Lagarde added.

The ECB forecasts average annual inflation back under 2 per cent next year, a figure that is probably out of date as private estimates, along with projections from the European Commission, all point to price growth of more than 2 per cent.

Ms Lagarde added that wages could also respond to this inflation but repeated that the ECB still did not see price growth lingering via so-called second-round effects.

“We do see wage growth next year potentially rising somewhat more than this year, but the risk of second-round effects remains limited,” she said.

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