ECB’s Holzmann: If No Second-Round Effects, Inflation Should Return to 2% Towards End-2022

31 January 2022

By David Barwick – FRANKFURT (Econostream) – Whether European inflation subsides soon depends on whether currently high rates of price growth trigger second-round effects, European Central Bank Governing Council member Robert Holzmann said late Sunday.

Speaking during a panel discussion on Austrian television station ORF, Holzmann, who heads the Austrian National Bank, said that whether inflation will go back down ‘is the big question. We don't know, but what we do know is why inflation has jumped so much.’

The outcome depends on how economic actors behave, he said: ‘if nothing happens, we expect it to go back towards 2% at the end of the year. But if the current shocks lead to excessive wage demands, or if individual companies push through their price demands, which are not justified, then second-round effects can occur.’

‘And these second-round effects can lead to inflation declining very slowly or even exploding as happened in the 1980s’, he continued. ‘And then it becomes very expensive, but also very painful. We at the ECB stand ready to take action. What we are doing at the moment, if you really want to, is looking millimetre by millimetre at how prices are developing, what the reasons for that are, to determine how and when we will act.’

The US has already taken clearer steps to deal with inflation because it is six to nine months ahead of Europe in its economic cycle; because inflation is much higher there; and because for historical reasons, ‘the US is inclined to act more quickly in order to prevent the difficult situation of the 1980s from occurring again’, he said.

‘What that means for the ECB now is that we have a situation where we have an inflation rate that we don't like, far from it, but we have better prospects than the US to get back to the 2%’, he said. ‘Also, if you look closely at the data, in the US there are already the first signs of wage inflation. We don't have that in Europe yet. This means that in the US we have to act more strongly to keep this at bay, which is not yet the case in Europe.’

If European inflation were at 3% at the end of 2022 and not seen subsiding, ‘then of course we would act’, he said.

Holzmann suggested that the ‘gigantic sums’ to be invested as part of the energy transition meant ‘that inflation will probably be higher for several decades in the future than the 2% we currently have.’