ECB: Price Rises More Widespread, Upside Inflation Risks Have Intensified

28 April 2022

By David Barwick – FRANKFURT (Econostream) – Price pressures have broadened and it is unclear how long underlying inflation will persist at levels above 2%, the European Central Bank said on Thursday.

In its third economic bulletin of 2022, the ECB said that upside inflation risks had intensified and cited three examples with respect to the medium term as well as one downside risk.

‘Price rises have become more widespread’, the ECB said, attributing this to energy market developments, supply bottlenecks and the post-pandemic recovery of demand.

‘Measures of underlying inflation have risen to levels above 2% in recent months’, it said. ‘It is uncertain how persistent the rise in these indicators will be, given the role of temporary pandemic-related factors and the indirect effects of higher energy prices.’

‘The upside risks surrounding the inflation outlook have also intensified, especially in the near term’, the ECB said. ‘The risks to the medium-term inflation outlook include above-target moves in inflation expectations, higher than anticipated wage rises and a durable worsening of supply-side conditions. However, if demand were to weaken over the medium term, it would lower pressure on prices.’

Wage growth was still generally muted despite historically low joblessness, but should accelerate with the return of the economy to full capacity, according to the ECB.

‘While various measures of longer-term inflation expectations derived from financial markets and from expert surveys largely stand at around 2%, initial signs of above-target revisions in those measures warrant close monitoring’, it said.

Inflation would stay elevated over the course of the next months, primarily due to energy prices, which the ECB suggested would ‘moderate to some extent’ after remaining high over the near term.

Monetary authorities were ‘very attentive to the current uncertainties’ and to the implications of incoming data for medium-term inflation, which would drive the adjustment of policy, the ECB said.

The Governing Council stands ready to adjust all of its instruments within its mandate, incorporating flexibility if warranted, to ensure that inflation stabilises at the 2% target over the medium term, the bulletin stated.

Still, support from fiscal and monetary policy remained ‘critical, especially in this difficult geopolitical situation’, the ECB assessed.

‘Within the Governing Council’s mandate, under stressed conditions, flexibility will remain an element of monetary policy whenever threats to monetary policy transmission jeopardise the attainment of price stability’, the ECB said.