ECB: Second-Round Effects Largely Absent Under Euro, But Persistently High Inflation Increases Risk

3 August 2022

By David Barwick – FRANKFURT (Econostream) – Although second-round effects in response to more expensive energy have not generally been seen since the common currency’s advent, persistently elevated inflation makes it more likely that these will occur, the European Central Bank said on Wednesday.

In a pre-release from the fifth economic bulletin of 2022, due out Thursday, the ECB noted that in contrast to the 1970s and 1980s, when second-round effects from oil shocks were significant, ‘these have been largely absent on average in the period since the euro was launched.’

Under the euro, the impact on HICP inflation of oil shocks of similar magnitude has been ‘frontloaded but small and transitory’, the ECB said. On average with the euro, it said, ‘neither wage nor price setters have recouped the real income losses induced by oil supply shocks.’

The ECB suggested a number of structural factors that could explain this, including reduced dependence on energy, less wage indexing, weaker unions and a clearer monetary policy strategy.

‘Nevertheless, high and persistent inflation increases the risk of second-round effects materialising via higher wages and profit margins’, it added.