FRANKFURT (Businesshala) – A sudden, sharp rise in euro area inflation could prove sustainable if workers begin to expect higher prices and demand wage increases, European Central Bank board member Isabel Schnabel said.
Schnabel reiterated the ECB’s official line that price hikes, which according to Eurostat are projected to rise 3.4% annually in September, will ease next year.
But she joined a growing number of policymakers taking the risk that this might not happen.
“It is too early to say whether the current price dynamics will completely subside next year,” he said at a joint conference organized by the ECB and the Cleveland Federal Reserve.
“There are several sources of uncertainty that could exacerbate more persistent inflationary pressures.”
Among them, he listed inflation expectations and possible changes in people’s behavior when it comes to setting wages and prices.
“As we build our assessment of the medium-term inflation outlook, we keep our finger in the air to determine whether the wind will survive longer than just a temporary gust,” Schnabel said.
The German economist said that until now, there was “no indication” in market prices and in economists’ forecasts that high inflation would be trapped.
Accounts from the ECB’s latest policy meeting on Thursday showed policymakers had already begun to worry about upside risk when they met on 8-9 September.
“The risks to the inflation outlook … were widely considered to be sloping upward,” the accounts said, with policymakers arguing that the ECB should keep an eye on a potential inflation “regime change”.
ECB chief Christine Lagarde played down inflation fears in a press conference after the meeting, but has since struck a more balanced tone, while several of her colleagues have flagged their concerns in private and public conversations.
New ECB forecasts unveiled at the meeting put inflation at 2.2% this year, 1.7% next year and 1.5% in 2023.
But policymakers at the gathering also wondered whether their projection models were working well given the huge inflation this year.
“This raised doubts about how well the models relying on projections were able to capture the structural changes implied by the pandemic and the impact of the ECB’s new monetary policy strategy at present in the economy,” the ECB said.
Rate setters also debated a major cut in the monthly pace of its Epidemic Emergency Procurement Program (PEPP).
“It was argued that a symmetric application of the PEPP framework would demand a further reduction in the pace of procurement,” the ECB said. “From this perspective, buying momentum similar to the level prevailing at the beginning of the year would be appropriate.”
Some policy hawks went even further, arguing that as markets were already poised for an end to emergency buying without a significant impact on the financing situation, investors were well prepared.
“It was argued that markets were already expecting an end to net asset purchases under PEPP by March 2022,” the accounts showed. “The point was made that, even without the PEPP, the overall monetary policy stance remained overly accommodative.”
In the end, the ECB opted for a more cautious move, simply deciding to cut its emergency bond buys “moderately” for fear of upsetting the markets.