ECB Insight: Subtle Signs of Inflation Pessimism from ECB President Lagarde
17 March 2022
By David Barwick – FRANKFURT (Econostream) – A close look at European Central Bank President Christine Lagarde’s comments on Thursday suggests, albeit subtly, somewhat more pessimism about inflation than just a week previously.
Speaking at the conference The ECB and its Watchers, Lagarde’s assessment of the inflation impact of the Russian assault on Ukraine observed that manufacturing bottlenecks were ‘now likely to persist in certain sectors, prolonging price pressures for durable goods’.
That constituted a reasonably clear deterioration versus her view at the March 10 press conference, when she recognised the potential for the war to have a negative impact in this regard, but asserted that ‘bottlenecks have been showing some signs of easing’ and predicted that related price pressures should subside.
Lagarde today also noted the ECB’s baseline projection for 2022 HICP of 5.1%, but promptly added that ‘[i]n a more severe scenario … inflation might exceed 7% in 2022.’
The HICP estimate of 7.1% corresponds not merely to a ‘more severe’ scenario, but to the worst one considered by the ECB, meaning Lagarde chose to highlight the potential for this outcome – rather than even just the somewhat less severe ‘adverse’ scenario – alongside the central scenario.
A week ago, she had made no special mention of either of the two scenarios reviewed in tandem with the baseline.
Lagarde on Thursday also fretted noticeably more than she did last week about risks to inflation, including ‘de-globalisation and accelerated de-carbonisation.’
Of course, Lagarde can justifiably point to Russian dictator Vladimir Putin’s attack on Ukraine as having fundamentally changed the situation. The point here is simply that it has changed in such a way that it is hard to see her responding as she did only a few weeks ago on February 10 to an interviewer who asked her whether ‘greenflation’ was a concern.
‘No’, Lagarde said at the time. ‘The current impact of de-carbonisation on prices is minimal – be it from emissions trading or carbon taxes. … I think that the greenflation debate is exaggerated.’
Without wishing to read too much into the ECB president’s speech today, and allowing for the extreme uncertainty of the current environment, we think that it reflects slight unease about where inflation is headed, and anticipate further such signs ahead.