FRANKFURT (Reuters) – Measures of underlying inflation in the euro zone have risen above the European Central Bank’s 2% target and the ECB is closely monitoring inflation expectations, its president Christine Lagarde said on Thursday.
She said upside risks to the inflation outlook had intensified, especially in the near term.
Headline euro zone inflation hit a record high 7.5% last month, nearly four times the ECB’s target, and price growth could accelerate for several months before peaking around mid-year as the war in Ukraine pushes up energy and some food prices.
“Measures of underlying inflation have risen to levels above 2% in recent months,” Lagarde told a news conference, adding that it was uncertain how persistent the rise would prove.
“While various measures of longer-term inflation expectations derived from financial markets and from expert surveys largely stand at around 2%, initial signs of above-target revisions in those measures warrant close monitoring.”
With much of the recent inflation driven by an external energy shock related to the war, price growth is likely to fall back on its own over time, especially since wage growth, a precondition for durable inflation, remains muted.
But longer-term inflation expectations have started to move higher, raising fears they may become “unanchored”, a phenomenon that worries policymakers as it suggests a loss of credibility.
“The last thing that we want to see is inflation expectations at the risk of de-anchor(ing),” Lagarde said.
Wage growth is also likely to follow, especially since the unemployment rate is at a record-low 6.8% and labour shortages have started to emerge.
(Reporting by Balazs Koranyi; Editing by Catherine Evans and John Stonestreet)
