ECB’s de Cos: Inflation Risks Remain on the Upside and Have Intensified

26 July 2022

By David Barwick – FRANKFURT (Econostream) – Inflation risks are still predominantly to the upside and have worsened, European Central Bank Governing Council member Pablo Hernández de Cos said Tuesday.

At a forum organised by Spanish daily La Vanguardia, de Cos, who heads Banco de España, said that various negative economic factors were ‘casting a considerable shadow over the outlook for the second half of 2022 and beyond.’

Post-pandemic economic reopening was an ongoing boost, as were a strong labour market, pent-up savings and fiscal support, he said.

A longer Russian war of aggression against Ukraine and in particular an associated cut-off of Russian energy were ‘a significant downside risk to growth’, he said. ‘Moreover, the war could further worsen confidence and aggravate supply constraints, while energy and food costs could remain persistently higher than expected. A faster slowdown in global growth would also pose a risk to the outlook for the euro area.’

Inflation meanwhile ‘has spread to many components of the consumption basket’, and ‘inflationary pressures are increasingly spreading to more sectors’, bolstering core measures, he said. The weaker euro has also contributed, he noted.

‘Looking ahead, inflation is projected to remain very high due to continued energy and food price pressures and latent pressures in the price formation process’, he said. ‘Also because of the effects of the reopening of the economy and global supply shortages.’

Assisted by ongoing monetary policy normalisation, a return to price stability in the longer term is anticipated, assuming the energy market stabilises, he said. Wage developments and inflation expectations are ‘key’ factors in this context, he said.

‘Wage growth has continued to rise gradually over the past few months, but remains generally subdued’, he said. ‘In turn, most indicators of long-term inflation expectations are now around 2%, although recent revisions of some indicators above the target require continued monitoring.’

‘In any event, risks to the inflation outlook remain on the upside and have intensified, particularly in the near term’, he said. ‘Over the medium term, these risks include a lasting deterioration in the productive capacity of our economy, persistently high energy and food prices, an increase in inflation expectations above our objective and higher than expected wage increases. However, a weakening of demand over the medium term would reduce inflationary pressures.’

As last week, de Cos said that the greater-than-expected rate hike decided by the Council ‘does not imply an increase in the terminal level of the rate path.’ Normalisation would proceed meeting by meeting on the basis of incoming data ‘and how they affect our medium-term inflation target of 2%’, he said.