ECB has the least worrying inflation problem

European Central Bank President Christine Lagarde arrives for the second day of an EU summit at the European Council building in Brussels, Belgium, June 25, 2021.

LONDON, October 1 (Reuters Breakingviews) – Christine Lagarde faces a problem her predecessors at the European Central Bank would have appreciated: too much inflation. This will embolden those who want the Frenchwoman to end her emergency monetary stimulus. But long-term price pressures are less of a headache than for the ECB president’s peers in the US and UK.

Eurozone consumer prices rose 3.4% in September from a year earlier, the fastest pace since 2008, according to a first official estimate released on Friday. That’s well above the ECB’s 2% target and means rate-setters will disagree on how long the bank’s ultra-flexible bond buying program should be used for. power plant, launched at the height of the pandemic last year. National differences add to the tension: inflation is 4.1% in Germany, less dazzling at 2.7% in France; and only 1.3% in Portugal.

As in the US and UK, where inflation is also rising faster than central bank targets, pandemic-related distortions are partly to blame. Prices took a hard hit last year, accentuating the jump now, and supply chain issues are affecting all three economies. Like Federal Reserve Chairman Jerome Powell and Bank of England Governor Andrew Bailey, Lagarde expects these factors to fade away.

Even if they persist, her inflation-related headache will be less severe. The eurozone economy is recovering more slowly than in the United States and the governments of the bloc are spending less generously than President Joe Biden.

The euro zone is also experiencing more serious structural labor problems. The proportion of unemployed unemployed for at least 12 months was 5.6% in the United States and around 20% in Great Britain, according to OECD data for 2020. In Italy, the share is over half, while in Germany and France it exceeds one third. This makes it harder for eurozone workers to demand higher wages and reduces the likelihood that big pay rewards will boost inflation.

Lagarde can therefore insist that the ECB maintain an ultra-flexible monetary policy and fight to retain at least some of the flexibility offered by its emergency purchase program in the event of a pandemic. It also means that the ECB will not consider a hike in key interest rates until long after the Fed and Bank of England have increased.

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NEWS CONTEXT

– Consumer prices in the euro area increased by 3.4% in September compared to a year earlier, according to a first estimate published on October 1 by the statistical office of the European Union. This is the highest annual inflation rate since 2008 and compared to a 3% increase in August.

– European Central Bank President Christine Lagarde on September 28 played down inflation fears and promised the bank would maintain loose monetary policy as the Covid-19 crisis eases.

– “The main challenge is to ensure that we do not overreact to transient supply shocks that have no impact on the medium term,” Lagarde said at an ECB conference.

– “We still need an accommodating monetary policy to exit the pandemic in complete safety and to bring inflation down to 2% on a lasting basis,” she added.

Editing by Peter Thal Larsen, Oliver Taslic and Karen Kwok

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