- The base scenario remains for a sharp drop in inflation in 2022
- The hawks stay on board with an easy policy
- Key conditions absent for persistent inflation
FRANKFURT, September 15 (Hfrance.fr) - Eurozone inflation spike above European Central Bank target is "temporary " bump ", ECB says - dusting off phor used a decade ago by its then president, Jean-Claude Trichet.
In 2011, the ECB raised interest rates twice in four months, with Trichet giving in to German pressure despite the belief that a commodity-fueled price hike would be short-lived. It is now recognized even by the ECB itself as a political mistake that exacerbated the crisis of the debt of the euro zone.
Having learned to their dicepens, current ECB policymakers say they won't tighten monetary policy until inflation is stable at the bank's 2% target, which they don't expect to happen more than two years.
"Inflation the outlook remains characterized by a bump in 2021 followed by more moderate rates in 2022 and 2023 " , the ECB said last week, attributing recent price hikes to more expensive commodities and bottlenecks resulting from the pandemic.
Tuesday's August US inflation reading, the slowest in six months, may lend weight to the notion that recent price pressures are temporary. learn more
But the ECB will be on the lookout for any signs that the influx surgeation is turning into something more sustainable, especially if consumers and businesses stung by higher prices adjust their expectations accordingly.
Here is why are ECB policymakers sticking to the narrative "bump " and what metrics they watch:
WHAT'S THE BOSS MADE OF?
Eurozone inflation hit a 10-year high of 3% in August. The increase was fueled by energy costs, but the price of industrial goods and food also increased.
C ' is because the COVID-19 pandemic has strained global logistics due to health restrictions and labor shortages, pushing freight prices to record highs and making imports more expensive.
This also exacerbated a halow prices for some grains due to poor harvests.
Shanghai (Export) Containerized Freight Composite Index (Scfi)
IS THIS GOING TO GOBE?
The central banks of the 19 countries that use the euro believe that price growth will slow once these imbalances between demand and supply will have eased.
They believe that the increase is partly explained by "base effects ", the prices having been abnormally low there a year ago as the pandemic shut down businesses and kept people at home. They also cite a reduction in German value added tax which was part of the government's COVID-19 support program.
The euro area 's the high level of structural unemployment and the aging of the population constitute a ceiling to its sustainability prospects for growth and inflation.
The ECB expects inflation to average 2.2% this year before falling to 1.7% next year and 1.5%in 2023.
Core inflation, which excludes energy and food prices and is considered a better indication of the underlying trend, stood at 1.6% in August and is expected to average between 1.3% and 1.5% for the next two years.
HICP inflation in the euro zone
THE HAWKS ARE ON BOARD?
Yes . Even the most hawkish member of the ECB's board of directors, Germany's Isabel Schnabel, subscribes to the view that "inflation will in all likelihood come down significantly as early as next year " .
It's a long way from 2011, when ECB chief economist Juergen Stark imposed two rate hikes with a combined value of 50 basis points, against his own staff's projections that inflation would decline.
At the time, Stark underlined the risks " associated with further increases pricesenergy and commodities "while Trichet refused to put more emphasis on core inflation , which painted a more favorable picture.
In contrast, Schnabel this week declared "a premature tightening of monetary policy in response to a temporary hike inflation would stifle the recovery ", while ECB President Christine Lagarde underlined the weakness of the base price. find out more
Robert Holzmann, chef Austrian central bank, appears to have the more radical view, arguing that price pressures may prove to be more persistent than currently thought, so the ECB may tighten policy sooner than expected. learn more
Producer price vs consumer price vs base price
AND IF THEY ARE WRONG? The ECB has a dismal track record when it comes to predicting inflation, having mostly overestimated price pressures over the past decade after underestimating them between 2009 and 2011.
Its business models, like others, extrapolate the future from the past, which means that a decade of Too low inflation could lead them to predict that prices will continue to tread.
This is why central bankers are on the lookout any sign that the sudden surge in prices is spilling over to wages and consumer and business expectations, potentially sparking an inflationary spiral - indeed, anything that undermines the "bump " history.
Core inflation projections
NO CONCLUDING EVIDENCE
So far there is no conclusive evidence that this is happening.
On the one hand, German consumers expect inflation to be 3.6% in the 1Next 2 months, the highest level since The Bundesbank poll started its poll in 2019.
And there are many reports of staff shortages, especially for restaurants and bars.
On the other hand, consumers seem reluctant to spend all the savings they've accumulated during the COVID-19 shutdowns and salary growth has been modest . learn more
the bet to open the German unions for a 5% increase in the salaries of regional civil servants is lower than the 6% requested in the previous round in 2019 - andGerman final wage allocations are generally well below initial demand.
Eurostat data from Wednesday showed that wages in the area euro actually fell 0.4% in the second quarter after rising 2.1% in Q1.
This uncertainty is the reason why the ECB postponed any decision on the future of its stimulus program until December.
"We will be very attentive to the autumn negotiations which usually take place in some countries," Lagarde said last week. "But at this point, we don't expect these salary increases ... to be very large.
Bundesbank survey on expectations of consumers Report by Francesco Canepa; Edited by Balazs Koranyi and Catherine Evans
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