ECB Insight: Meeting Account Confirms Lagarde Played Down Upside Inflation Concerns
20 January 2022
By David Barwick – FRANKFURT (Econostream) – The account of the European Central Bank’s policy meeting of 15-16 December, released by the ECB on Thursday, suggested that reasonably widely held views of the inflation outlook expressed at the gathering got relatively little airtime at the subsequent press conference by President Christine Lagarde - or since.
Council members only ‘largely’ agreed with the inflation assessment of Chief Economist Philip Lane’s macroeconomic introduction, which appeared focussed on medium-term undershooting of the ECB’s price stability target and, judging by the account, was consistent with well-established practice in giving somewhat short shrift to the existence of upside risks.
Meeting participants mostly concurred with what has been the gist of many of their public comments since December 16: that headline inflation, currently driven by energy prices above all, would stay high for now but decline over 2022 in the wake of calmer energy prices and supply bottlenecks.
But the account suggests that opinions were distributed substantially more widely, with one or more Council members, for example, having called attention at the meeting to the recent marked increase in core inflation and the more broad-based nature of HICP, ‘with barely any of the items in the HICP still exhibiting the low rates of change in prices prevailing in the pre-pandemic period’, the account said.
‘This cautioned against portraying the current high level of inflation as being the result of just energy price developments and temporary factors’, the account said.
According to the account, ‘members’ – a wording that would be in line with a not insignificant base of support – ‘were of the view that there was elevated uncertainty as to where inflation would settle in the medium term after the current hump.’
While Lagarde naturally emphasised at the press conference the uncertainty under which monetary policy is operating, she implicitly relied heavily on the forecasts of 1.8% for 2023 and 2024, and, doubtless keen not to appear too hawkish, did not broach the idea that inflation might ultimately settle at a higher level.
Nor did her words appear influenced by the remark of one or more Council members at the meeting ‘that, in any case, this outlook did not imply a return to the low inflation regime of the pre-pandemic period but pointed to a regime more similar to that prevailing before the great financial crisis when inflation had averaged around 2%’, as the account said. ‘This was to be seen as a welcome development.’
That this would indeed be a benign outcome, someone argued, ‘could not be taken for granted and high inflation could persist for longer than anticipated.’ In this context, according to the account, mention was made of the possible deficiencies of the ECB’s models, an idea that had been thematised at the previous monetary policy meeting as well.
‘Faced with a potential turning point in the inflation outlook, it was seen as paramount to pay close attention to timely signals emerging from the real economy, notably those from firms and wage-setters, rather than relying mostly on models and past patterns’, the account said.
It was recognised that higher medium-term inflation would probably require stronger wage pressures, a potential consequence of persistently high inflation.
The net inflationary contribution of Omicron was viewed as uncertain, but ‘it was argued’ that experience of the pandemic suggested the variant’s implications for supply could ‘entail significant upside risks to inflation.’
That argument appears not to have found favour with Lagarde. Asked specifically about Omicron and inflation at the press conference a few hours later, she replied that ‘it might have a dampening impact on demand, because people will consume less; people will go around less; people will be under restrictions, but it might also have an impact on the supply side as well. The balance between the inflationary or deflationary impact that Omicron will have is still totally uncertain …’
But, according to the meeting account, Council members were not done when it came to upside inflation risks, questioning the assumption that energy prices’ contribution to HICP in 2023 and 2024 would be ‘well below historical average levels’; noting that carbon prices would add still more upward pressure; and observing that owner-occupied housing, yet to be included, would have added 0.2-0.3 point to 2Q 2021 inflation.
‘Is there an upside risk?’ Lagarde asked rhetorically at the press conference. ‘There is possibly an upside risk, but I think that staff, in putting their projections together, have in particular anticipated some impact on wages.’
And that was as far as she wanted to go on upside inflation risks.
It seems at least possible that Lagarde takes cues on such things from Lane, her chief economist and evidently well aligned with her on policy. More generally, she probably fears making any utterances that could be seen as more hawkish than would be consistent with the pace at which she intends, if all goes well, to finally usher monetary policy into the new normal that eluded her predecessor.
That is, one must acknowledge, a delicate operation at times, precisely when it comes to communication. Still, one can’t help but think that sweeping under the carpet macroeconomic assessments at odds with her vision has the potential to backfire.