ECB’s Lagarde: ‘We Should be Very Vigilant About Services’ Inflation

23 December 2024

By Marta Vilar – MADRID (Econostream) – European Central Bank President Christine Lagarde said on Monday that the ECB is getting near to defeating inflation but that caution must still reign due to the evolution of services inflation.

In an FT podcast, Lagarde said that the ECB was closer to declaring victory over inflation but that she had to say that ‘with a little reservation because I still believe that we should be very vigilant about services.’

Inflation in the sector was still at 3.9%, not easing much, and had been around 4% for a long time, she said.

The ECB had to be ‘cautious and vigilant’, according to Lagarde, for three reasons: wages, profits and sectors in which inflation was still high.

‘Obviously, there has been a catch-up,’ she said about wages. ‘There was lag time between price increases and wages increases. I think we’re coming close to the end of that process where wages have caught up with prices.’

At the same time, corporate profits were falling and absorbing the extra cost of higher salaries, she said.

The third element that called for caution according to Lagarde were what she called ‘late-comers’, namely sectors in which price increases took a while to take place, such as insurance.

‘I hope they will not be the late-leavers and they’re not going to renew the significant increase that we saw last January’, she said about the insurance sector.

Asked if the ECB bore some responsibility for the bout of inflation, given the ultraeasy monetary policy during the preceding pandemic, Lagarde said that she could perhaps question the volume of the PEPP and TLTROs, which totalled €4 trillion.

‘I think in retrospect it’s easy to say, ah, it could have been, it should have been a bit less than that because it was actually conducive to the episode that we then saw’, she said.

Lagarde ‘very much’ hoped the Eurozone would not return to a scenario where interest rates neared zero. ‘And we are conducting our monetary policy in that spirit of getting to target and then being sustainably at that target.’

If there was to be a trade war between the US and Europe, that would be negative for the world economy, but could also ‘turn out to be bad for the US economy, for that matter,’ she said.

Europe had to negotiate, given the big size of the US economy and its transactional approach, according to Lagarde.

‘[Y]ou have to adapt your game and you have to identify your strength, improve them if you can’, she said. ‘Identify the weaknesses on the other side, and there are. And then enter into that negotiation. And I’m sure that that’s what will happen.’