ECB Insight: Drumbeat of Inflation Warnings Gaining in Volume
20 September 2021
By David Barwick – FRANKFURT (Econostream) – Officials of the European Central Bank have been all but lining up in recent days to sound the alarm with respect to the potential for euro area inflation to come back to life sooner and more vigorously than expected.
Being central bankers, they have been doing so in appropriately understated fashion. But they are doing so nonetheless, and their message comes across all the louder for not being spread this time only by the usual hawks – it is after all well known that Bundesbank President Jens Weidmann considers upside inflation risks to outweigh those to the downside.
While none of those who have now started to profess growing concern about the inflation outlook are necessarily a dove’s dove, they have generally been among the moderates who tend to hew closely to dominant thinking within the Eurotower.
Significant as well is the fact that the monetary policymakers in question have included some of the most highly ranked members of the Governing Council.
In a speech at the start of last week, for example, Executive Board member Isabel Schnabel, who has been relatively cautious on the subject for some time, said that notwithstanding the ECB’s baseline scenario, ‘we are very diligently monitoring whether the underlying forecast assumptions might not underestimate the possibility of higher inflation over the coming years.’
‘There are growing indications that the current supply disruptions and commodity shortages could be prolonged’, she warned.
She was echoed on Friday by none less than Vice President Luis de Guindos. ‘Inflation this year may turn out even higher than we now think if the supply problems persist’, he told Dutch daily Het Financieele Dagblad. ‘That has consequences not just for the prices of microchips and semiconductors, but also for energy and transport prices, for instance.’
Moreover, he warned, although currently elevated inflation had thus far had limited second-round effects on wages, ‘[t]hat may change in the autumn, when many wage negotiations get under way and we will be vigilant on these possible developments.’
De Guindos has in general been on what we earlier in the week had characterised in this space as a ‘slow but steady trend’ in the direction of a less dovish policy standpoint, and his inflation comments fit in well with that assessment.
Also on Friday, Central Bank of Ireland Governor Gabriel Makhlouf said at a conference that there was ‘a lot of evidence’ backing the notion that recent high HICP would be temporary, and then quoted Schnabel to suggest that it might not be so temporary after all:
‘But, as my colleague Isabel Schnabel highlighted this week, “there are growing indications that the current supply disruptions and commodity shortages could be prolonged…. The longer the supply chain problems persist, the greater the likelihood that firms will pass through their cost increases into consumer prices.”’
‘So we need to be humble and recognise the uncertainty reflected in the slack and bottleneck conundrum and vigilant to the risks’, he added.
Later in the day, a blog piece under his name on the central bank’s website was yet more guarded, saying that ‘there may be some cause for a cautious assessment of the inflation outlook. In the aftermath of the pandemic, many uncertainties remain, and structural changes to the economy may emerge to counteract the forces that have kept inflation low for so long.’
In an interview with Politico published on August 9, Makhlouf had erred on the dovish side when asked about the potential for an upward revision in Eurosystem staff forecasts.
‘If you had asked me a few weeks ago there would have been a bit more confidence, but the Delta variant has obviously just increased uncertainty’, he said then.
Mārtiņš Kazāks, Governor of Latvijas Banka, in an interview with Bloomberg appearing Friday and then again at a conference today made clear that he saw upside potential despite the upgrade that already took place just days ago.
‘There is perhaps some upside for those numbers to be revised up in the following forecasting rounds’, he said. ‘I agree with the current outlook, but I would say that the balance of risks for inflation are somewhat on the upside.’
At this stage, the drumbeat of warnings about inflation is as intense as one could reasonably expect, given the much more subdued tones mere weeks ago. A more dramatic increase in volume would justify questions – perhaps warranted anyway – as to whether the ECB was behind the curve or overly complacent for too long about too-high inflation.