Economic Watch: Persistent price hikes pile pressure on ECB

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FRANKFURT, Oct. 2 (Xinhua) -- Prices in the euro area continue to rise at a fast clip, stoking heightened concerns among economists about inflationary pressures despite reassurances from the European Central Bank (ECB).

Eurozone inflation accelerated to 3.4 percent year-on-year in September, reaching a 13-year high, according to a flash estimate published on Friday by Eurostat, the statistical office of the European Union.

The data were released on the heels of a closely-watched two-day forum held at the ECB and attended by some major central bank chiefs.

Both ECB president Christine Lagarde and Federal Reserve Chair Jerome Powell renewed their belief at the event that the surging inflation seen across major advanced economies was temporary.


In Germany, the euro area's largest economy, the inflation rate climbed to 2.3 percent in June, overshooting the medium-term target of 2 percent stipulated in the mandate of the ECB. Inflation has been on the rise ever since and shot up to 4.1 percent in September, a level not seen since December 1993.

The hikes in the Germany have added to worries that the worst has yet to come.

Joerg Kraemer, chief economist of Commerzbank in Germany, believes the hike streak will continue because companies have not passed on the elevated costs to consumers.

Elevated inflation rates have been a shared concern among some euro area countries. Spain registered an increase of 4 percent, hitting a 13-year high, while France saw a 2.7 percent increase, a 10-year high.

Kraemer's prediction echoed that of Lagarde. The ECB chief said in a speech on Tuesday that the bank expected inflation throughout the euro area to climb further.


Digging deeper into the root causes of inflationary pressures, Lagarde blamed the pandemic which entailed a recession and an "atypical" recovery "that has few parallels in history."

Thanks to the economic measures taken by euro area governments, household incomes averted a shockwave and demand has been kept intact. In 2020, household real disposable income dropped a mere 0.2 percent, Lagarde said.

With shops locked and restrictions put in place in response to the pandemic, people found fewer ways to spend and saved more money.

According to Bundesbank, Germany's central bank, the amount of money parked in private German bank accounts increased by 182 billion euros (approximately 211 billion U.S. dollars) in 2020.

Once most lockdown measures were lifted and economies reopened, the pent-up demand was released, leading to an imbalance of supply and demand. The imbalances witnessed in some sectors are pushing prices up, Lagarde said.

Soaring energy prices in particular aren't helping.

According to the Federal Statistical Office of Germany, energy prices have been under dramatic upward pressure for months, leaping 9.4 percent in June and hovering over 10 percent in July and August before catapulting to 14.3 percent in September.

The ECB maintained that half the inflation seen in the euro area today is due to energy prices.

Around 60 percent of the increase in inflation in advanced economies is caused by a rebound in energy prices from lows in 2020, Neil Shearing, group chief economist of Capital Economics, a macro research institute, said in a note on Thursday. Other factors include supply shortages and reopening effects.


In a bid to placate those who keep a wary eye on surging inflation, Lagarde tried to play down the menace. She reiterated, in the similar tone as her U.S. counterpart, that inflation increases are short-lived.

"Monetary policy should normally 'look through' temporary supply-driven inflation so long as inflation expectations remain anchored," said Lagarde.

The ECB expects inflation to decline once the pandemic-driven effects pass. In the long term, the central bank expects inflation to rise to 1.75 percent to 1.8 percent. "But it is still some distance away from our symmetric 2 percent target."

Conventional wisdom of setting the inflation target at 2 percent has been questioned by some economists given that interest rates in the euro area have been kept at ultra low levels.

The central bank of New Zealand was the first in the world to set a target inflation rate and became successful in reigning inflation in. The practice has been adopted gradually by more and more central banks across the world.

Some analysts argue that it would help boost the labour market if inflation remain moderately higher than 2 percent. A hasty reversal of the accommodative stance of the central bank could jeopardise an economic recovery which does not appear to be solid.

However, voices of concern have not vanished despite the widespread belief that the surge in inflation is transitory, and the possibility of inflation spiralling out of control can not be ruled out altogether.

The Capital Economics analysis suggests that the costs outweigh the benefits once inflation rises above 5 percent, particularly in more developed economies, Shearing said.

"Accordingly, while some governments and central banks may become increasingly comfortable with inflation rates of 3-4 percent, none are likely to willingly allow it to accelerate beyond these rates to 5 percent or more in the developed world." Enditem

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