ECB policymakers acknowledge growing inflation risk By Reuters
FRANKFURT (Reuters) – European Central Bank policymakers still see the recent inflation surge as temporary but a growing number appear to be acknowledging the risk that price growth may exceed their relatively benign projections.
The ECB sees a sharp drop in inflation that will keep price growth below 2% over the next few years. However, the inflation rate was 3%, which is well above its 2% target. It could also rise to 3.5% by November.
A rise in commodity prices and signs of growing labour shortages could jeopardize this “hump” profile of consumer price growth.
Luis de Guindos (ECB Vice President) maintained his main scenario, but highlighted the upside risks. He also warned that the bank should be aware of the danger that short-term price rises may become permanent.
“Some European countries index their pensions and salaries to inflation,” de Guindos stated at an online conference.
It is best to avoid this because it can lead to a permanent upward inflation if there is a clear indexation in the economy to the effects of temporary shocks. That is why we must avoid it.
He warned of the dangers that production and commodity price bottlenecks could lead to a “second round” inflation.
Yannis Saintournaras from the Greek central banking chief acknowledged that the actual rate of price growth might be higher than the ECB projected, but argued this shouldn’t force the ECB towards tighter policy.
Stournaras spoke to Politico about the upside risks of inflation. “In the past, however, we have over-predicted inflation [on the higher side], expecting that it moves towards 2% in the medium term.”
For most of the last decade, the ECB missed its targets. Policymakers argue now that the bank should not be quick to move and should accept a small overshoot in order not to tighten policies too soon.
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