European Central Bank chief economist Philip Lane said the euro zone's bout of "unexpectedly high" consumer price increases does not herald the sort of problem that global economies faced in the 1970s.
"If we look at the situation over the medium term, the inflation rate is still too low, below our 2 per cent target," he told Spanish newspaper El Pais in an interview published Monday. "This period of inflation is very unusual and temporary, and not a sign of a chronic situation. The situation we are in now is very different from the 1970s and 1980s."
The remarks push a house view that was challenged in recent weeks by investors who appeared to doubt the ECB's analysis on inflation, and its commitment to keep interest rates ultra-low next year. Last Monday ECB president Christine Lagarde openly stated that the conditions warranting such an increase in borrowing costs were "very unlikely".
Separately, in a series of tweets by the European Central Bank, Prof Lane explained that monetary policy affected inflation with a considerable time lag.
“Abrupt tightening of policy would not lower inflation now but slow the economy and cost jobs, leading to inflation below our 2 per cent target later,” he said.
He said the bank’s analysis showed that three temporary factors that are pushing up inflation now are projected to fade over the next year.
These were unusually low prices during 2020 and temporary tax cuts; an unexpectedly strong post-Covid recovery that was causing supply bottlenecks; and a surge in energy prices.
“In the near term supply bottlenecks and rising energy prices are the main risks to the recovery and the outlook for inflation,” Prof Lane’s tweets said. “However, economic activity could outperform our expectations if consumers become more confident and save less than expected.”
Patterns
“We will look out for unsustainable patterns that might lead to pressures that are undesirable from an inflation perspective,” he said. “But let me emphasise: we don’t see this right now. It’s more of a risk factor that we need to take a look at.”
The bank’s governing council is also showing signs of a split on the outlook for prices. Ms Lagarde has highlighted how officials are monitoring wages for signs of a shift in risks, though Prof Lane insisted that there is no sign of a threat so far.
Speaking alongside Federal Reserve officials at an event hosted by the Brookings Institution think tank in Washington DC, also on Monday, Prof Lane said: "If it's a true, generalised economy-wide shift in inflation expectations, you're going to see it in wage and price behaviour." – Bloomberg / Financial Times Limited 2021
