Energy pressures could outlast Covid supply shocks
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European Central Bank President Christine Lagarde.
DANIEL ROLAND | AFP | Getty Images
LONDON — The volatility in energy prices could outlast the current Covid-related supply issues in the global economy, European Central Bank President Christine Lagarde has said.
Like many regions around the world, disruptions to supply chains caused by the coronavirus and subsequent social restrictions have had an impact on the euro area. For example, the German auto industry has had to deal with bottlenecks caused by a semiconductor shortage.
However, a surge in energy prices — and its impact on inflation figures — may be a much longer-term issue for the region, Lagarde told CNBC’s Annette Weisbach in an exclusive interview Thursday.
She said that things will “fall into place” as new supply sources are identified, and described the current economic climate as an “adjustment period.”
The matter of energy will likely stay with us for longer. Because we are transitioning, as well, from fossil industry driven sources of energy … We aspire to be much less [reliant on] fossil sources,” Lagarde said.
Gas crisis
The euro zone — and the wider European continent — is grappling with a natural gas shortage that’s pushing up energy bills for consumers. France, Spain, Greece, and Spain have begun to intervene in order to mitigate some of the economic harm to citizens.
It’s not clear how long these rising prices in the energy markets will last and what impact they have on inflation within the 19-member regions.
Some industry experts Some experts believe that recent price rises for natural gas are due to the EU’s new climate policies. They also reflect the EU’s wider shift toward renewable energy.
The EU’s climate chief, Frans Timmermans, has insisted It is unlikely that price increases were caused by the bloc. He told the European Parliament that only about one fifth of the increase in prices can be attributed CO2 prices rising. All the rest is simply market supply shortages.
Lagarde was asked whether climate targets would lead to inflation or deflationary transitions toward renewables. She replied that she had begun to notice academics looking into the matter and we are starting see some studies.
After reading some of these, I have concluded that the ECB is most likely to cause prices to rise for a limited time. Later on it may also affect inflation.
Inflation more stable next year
The ECB’s only mandate is to work toward price stability, defined as an inflation target of 2%. Large swings of consumer prices can increase the chances that central banks will take monetary actions.
This is a major theme of ECB watchers, as consumers prices have been increasing steadily in recent months. However, August saw inflation rise to its highest level in 10 years. Further spikes will likely occur in the months ahead.
We have increased many projections during the last quarter, which is a fact. The economy has been growing faster, as well as inflation and employment. Lagarde explained that it was a good package because it indicates the response of our economies.
She said that it causes frictions because there are bottlenecks and disruptions in supply chains due to the pandemic. Reinitializing the machine takes time.
We hope that it lasts when it is about growth so that activity keeps up; that it lasts when it’s about jobs so that unemployment drops and employment goes up; that for prices, we believe that prices will return to stability because most of the reasons that have caused higher prices to be temporary,” Lagarde said to CNBC.
The ECB had earlier this month estimated that inflation would be 2.2% by the end of the year. The ECB expects this number to fall to 1.7% and 1.5% in 2022, and to be 1.5% and 1.5% respectively by 2023. Revisions to the forecasts will be available in December.
“When you look, you know, at what’s causing [higher inflation], a lot of it has to do with energy prices. Prices were still at the bottom a year ago. These prices have moved up over the past year and that difference is explaining much of the inflation people are feeling at the moment. Lagarde reiterated Thursday the central bank’s stance.
‘No idea’ on time lag with Fed
Nonetheless, there’s a lot of anticipation in the market about what the ECB will do now regarding monetary policy — as well as the Fed. In the United States, Federal Reserve officials reiterated Wednesday that a tapering of bond buying is coming “soon.”
The U.S. central bank is facing similar pressures to the ECB, with inflation rates also moving higher and an overall improvement in economic sentiment since the coronavirus pandemic first emerged.
Lagarde was unable to compare Lagarde’s timeline and the Fed’s plan for reducing its stimulus.
I don’t know. “I don’t have an idea, because we operate with different programs,” she stated.
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