ECB boss Lagarde believes the rise in inflation is temporary

by time news

Dhe inflation in the euro zone, which soared to 3 percent in August, is likely to rise even further in the course of the year: Nevertheless, monetary policy must not overreact now – that is the biggest challenge for the central bank at the moment, said Christine Lagarde, President of the European Central Bank (ECB), on Tuesday at the opening of the two-day ECB forum on monetary policy.

The annual event, which has been the counterpart to the US Federal Reserve Conference in Jackson Hole since 2014, is now being hosted online for the second year in a row.

Atypical economic recovery

Lagarde argued that there is currently an “atypical recovery” of the eurozone economy from the recession, which is leading to an increase in inflation rates. Usually, the depth of a recession determines the speed at which one can get out of the crisis. After the financial crisis, for example, it took seven years for economic output to return to pre-crisis levels. This time it goes much faster: “We are assuming that the gross domestic product of the euro area will exceed the pre-crisis level by the end of this year – three quarters earlier than we had forecast last December.”

This recovery process is currently causing supply bottlenecks and driving inflation, whereby so-called base effects such as the extremely low oil price last year and the lowering and raising of VAT in Germany played an important role. But one has to keep an eye on whether these bottlenecks may last longer than currently expected and whether they have an impact on wage developments and inflation expectations.

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In addition to these temporary effects, which led to a temporary rise in inflation, it is possible that the pandemic could also trigger or intensify structural changes. “We have a decade of strong disinflationary forces behind us that have dampened the entire inflation process,” said Lagarde: “Structural changes could now exert both upward and downward pressure on prices.”

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