ECB has the least worrying inflation problem

Euro zone consumer prices rose 3.4% in September from a year earlier, the fastest pace since 2008

  
A woman walks past the European Central Bank (ECB) headquarter as the spread of the coronavirus disease (COVID-19) continues during an extended lockdown and a demand by the German government for more home office possibilities in Frankfurt, Germany, January 28, 2021.

A woman walks past the European Central Bank (ECB) headquarter as the spread of the coronavirus disease (COVID-19) continues during an extended lockdown and a demand by the German government for more home office possibilities in Frankfurt, Germany, January 28, 2021.

REUTERS/Kai Pfaffenbach

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

LONDON - Christine Lagarde is facing a problem her predecessors at the European Central Bank would have welcomed: too much inflation. This will embolden those who want the Frenchwoman to wind up her emergency monetary stimulus. But long-term price pressures are less of a headache than for the ECB president’s peers in the United States and United Kingdom.

Euro zone consumer prices rose 3.4% in September from a year earlier, the fastest pace since 2008, an early official estimate showed on Friday. That’s well above the ECB’s 2% target and means rate-setters will be at loggerheads about how much longer to use the central bank’s ultra-flexible bond-buying scheme, launched at the height of the pandemic last year. National differences add to the tension: inflation is running at 4.1% in Germany, a less breakneck 2.7% in France; and only 1.3% in Portugal.

As with the United States and the United Kingdom, where inflation is also rising faster than central bank targets, pandemic-related distortions are partly to blame. Prices took a big hit last year, accentuating the jump now, and supply-chain snafus are affecting all three economies. Like Federal Reserve Chair Jerome Powell and Bank of England Governor Andrew Bailey, Lagarde expects these factors to fade.

Even if they persist, her inflation headache will be less severe. The euro zone economy is recovering more slowly than the United States and the bloc’s governments are spending less generously than President Joe Biden.

The euro zone also has bigger structural labour problems. The proportion of unemployed people who have been out of work for at least 12 months was 5.6% in the United States and around 20% in Britain, OECD data for 2020 shows. In Italy, the share is more than half, while in Germany and France it’s over a third. This makes it harder for euro zone workers to demand higher wages and reduces the likelihood that big pay awards entrench higher inflation.

Lagarde can therefore insist that the ECB keep monetary policy ultra-loose and fight to retain at least some of the flexibility that her pandemic emergency purchase programme affords. It also means the ECB won’t contemplate an increase in policy interest rates until long after the Fed and the Bank of England have hiked.

CONTEXT NEWS

- Euro zone consumer prices rose 3.4% in September compared with a year earlier, according to an early estimate published on Oct. 1 by the European Union statistics office. That was the highest annual inflation rate since 2008 and compared with a 3% increase in August.

- European Central Bank President Christine Lagarde on Sept. 28 played down inflation fears and pledged that the bank would maintain a loose monetary policy as the Covid-19 crisis eases.

- “The key challenge is to ensure that we do not overreact to transitory supply shocks that have no bearing on the medium term,” Lagarde told an ECB conference.

- “We still need an accommodative monetary policy stance to exit the pandemic safely and bring inflation sustainably back to 2%,” she added.

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

(Editing by Peter Thal Larsen, Oliver Taslic and Karen Kwok) ((For previous columns by the author, Reuters customers can click on PATTANAIK/ SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS http://bit.ly/BVsubscribe | swaha.pattanaik@thomsonreuters.com; Reuters Messaging: swaha.pattanaik.thomsonreuters.com@reuters.net))


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