Still Momentum in Eurozone Food and Core Inflation, ECB’s Lane Says

8 May 2023

By Xavier D’Arcy – BERLIN (Econostream) – European Central Bank Executive Board member Philip Lane on Monday said that there was still momentum in core and food inflation in the Eurozone.

Speaking at a Forum New Economy event, Lane defended the ECB’s prediction of simultaneous disinflation and economic growth in the euro area over the coming years.

Most prices were ‘coming down very quickly’, he said, and headline prices had peaked last year. There was ‘still momentum in food and core inflation, which is running in the opposite direction to the decline in energy inflation’, he said, though he expected these measures to peak this year.

The Eurozone economy was making up for ‘years of lost growth rates’ due to the pandemic and the Russian invasion of Ukraine, he said. ‘And this is why simultaneously, we are projecting that Europe is going to grow this year and grow even more strongly in 2024 and 2025.’

This was ‘not because of some massive demand boom, which there isn’t, but because the supply side of the economy is going to recover over time.’

‘Europe is not in a normal situation’, he said, and was ‘still recovering from the pandemic.’ He said this was ‘important because for many people, they find it hard to reconcile the economy growing and still having a lot of disinflation.’

He said there was ‘a strong theme out there and also in our own forecast, that there is a lot of disinflation. coming later this year.’

Profits had played a role in inflation, he said. Still, he said, ‘We don’t expect profits to remain very high.' He expected the reaction of wages to be delayed: ‘there’s a big mismatch last year which translated to a recovery in profits, but wages are slow moving.’ There was now ‘a very basic imperative in the labour market to rebuild real wages.’

‘Nominal wages have to go up a lot more than normal’ for workers to recoup losses in real wages, he said.

‘Our work shows signs that wages are picking up but from a low level, and in our forecast, we do have wages quite strong this year’, he said. However, the ECB expected that following a ‘deceleration’ in headline inflation, ‘the next wage deals should be lower than the wage deals we see right now.’

‘Labour markets have been slow moving’, he said. There was ‘a lot of momentum in labour markets’, and the effects of the inflation surge on wages were ‘going to take a while to play out.’

‘We do think […] significant wage increases have to happen’, he said, though these should happen in a ‘gradual way over several rounds.’

He underlined ‘savings going up, because we have actually a decline in consumption’ in the euro area, a development he said was ‘not consistent with demand-driven inflation.’ However, ‘the demand contribution is set to pick up', he said.

He added that an ‘increase in labour supply means that EU economy can grow with adding inflationary pressure.’

There had been ‘a big slowdown in credit’, he said. The ECB was raising rates ‘not because some of the inflation was demand side - it wasn't - but to make sure [inflation] returns to 2% quickly enough’ and avoid second-round effects, he said.

‘We know monetary policy has side-effects, so we’re trying to navigate […] whilst allowing the European economy to recover’, he said.