By Marta Vilar – LONDON (Econostream) – European Central Bank Governing Council member Joachim Nagel said Tuesday he was “not so concerned” about a strong wage response to the current inflation shock, as seen during the previous inflationary episode, but cautioned that the longer the shock persisted, the greater the risk was of second-round effects.

During the Q&A session at an event hosted by the Society of Professional Economists in London, Nagel, who heads the Deutsche Bundesbank, said unions were “in a very good position” in 2022, when inflation was high following a period of wage moderation.

“This time the situation is different,” he said, noting that it remained unclear how wage growth would evolve.

“The best we can do to avoid second-round effects is to bring the inflation rate down now,” he said, adding that he was “not so concerned” about wage growth reacting as it did in the last inflation episode.

Nagel said his main concern was that the current increase in energy prices would generate second-round effects.

“[W]e all know that if that [high energy prices] is going on longer, we will see some second-round effects,” he said.

The ECB was still in neutral territory, according to Nagel, who said he did not rule out having to take rates to “mildly restrictive territory” if the shock persisted.

“We have to keep our flexibility, we have to become agile as central bankers,” he added.

Nagel said energy markets were very volatile and that policymakers should take energy prices into account, “but it is definitely not the only indicator,” he said.

He said the ECB would continue to take decisions meeting by meeting and that forward guidance was “not … the best approach to really conduct monetary policy,” particularly given the current volatility.

The ECB’s reaction function was “understood by markets,” Nagel said, adding that there was no uncertainty over what markets expected to drive the ECB’s decisions.

Nagel denied that any "significant" second-round effects had materialized, notwithstanding "too high" core inflation. Still, he was "not relaxed," he said.

Asked about the ECB’s Transmission Protection Instrument, Nagel said it would not be activated solely in response to a particular country’s fiscal challenges, but only if there were problems with monetary policy transmission.

As to the impact of artificial intelligence, he said he expected AI to generate productivity gains, while noting that its impact on labor markets remained unclear.

On inflation, he said AI could initially generate upward pressure on prices, but that this could be offset as productivity gains materialized.