The price increase reached 4.5% in Germany. It should not decrease before “the current 2022” in Europe.
«L’inflation, l’inflation, l’inflation.Asked about the subjects that animated the Governing Council of the European Central Bank (ECB) on Wednesday and Thursday, its president, Christine Lagarde replied with these three words. The rise in prices accompanying the post-Covid economic recovery is obsessing central bankers. Some are already seeing the consequences by reducing their monetary support or raising rates. Europe is resisting. Inflation however reached 3.4% in September in the euro zone and “will continue to increase this year», Recognizes Christine Lagarde.
The figures for Germany (+ 4.5%) and Spain (+ 5.4%) for October, released on Thursday, are harbingers of this. This makes the wait-and-see position of the ECB, which has not changed any of its monetary instruments, more and more difficult to maintain. “Although the current rise in inflation will last longer than expected, we expect it to decline over the next year.“, Justifies the patron saint of the institution in Frankfurt.
«It took a while, but the ECB has finally shifted its rhetoric on inflation, from the broad denial of last summer, to a much more balanced assessment», Judge Carsten Brzeski, economist at ING in Frankfurt.
This price surge can be explained by three factors. First, the constraints linked to the recovery, shortages of materials or labor, due to demand greater than supply. Then, energy prices, linked to this strong economic recovery, but also to intrinsic factors linked to production. Finally, there remains a comparison effect with the previous year, a period during which Germany lowered its VAT rate.
No rate hike
The rise in energy prices “could reduce purchasing power in the coming months“, Warns Lagarde, and hinder the recovery which is confirmed, even if its pace slows down. This is starting to weigh on consumer morale. But, according to the ECB, these drivers of inflation will dissipate in the course of 2022, allowing us to wait for the economy to return to normal.
For the time being, the ECB is not afraid of a surge in wages with price repercussions, which could lead to a lasting inflationary spiral. On the contrary, its forecasters continue to expect a lasting return below its target of 2%, the trigger for a more restrictive policy and a rise in rates. The question gave rise to “a lot of introspection to verify our analysis», Specifies Lagarde.
Therefore, the ECB stands firm on its orientation that a rate hike is not for tomorrow, nor, apparently, the day after tomorrow. Even if it means giving the lie to the expectations of the financial markets, betting lately on a rate hike from the end of 2022.
Movements in this direction expected soon from the US Federal Reserve or the Bank of England do not shake the certainties of the ECB. The governors would not even have mentioned it.
However, the way out of the pandemic crisis is gradually taking shape. The pace of asset buybacks will decrease in the coming weeks. Christine Lagarde confirms the end of the emergency asset buyback program created for the pandemic (PEPP) in March 2022, as planned. The system that will follow will be the subject of discussions by the Board of Governors and announcements in mid-December. But this inflationary surge will undoubtedly have already helped to temper the ardor of the “colombes“, Partisans of the continuation of a broad support to the economy, in the face of”hawks», Worried about this overheating.
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