DUBROVNIK, Croatia (Reuters) – Falling energy prices will lower underlying inflation in the euro zone and rapid wage growth is not putting undue pressure on prices, European Central Bank Chief Economist Philip Lane said on Friday.
Inflation has been stubbornly high for nearly two years and some policymakers have been warning that underlying inflation was at risk of getting stuck above the ECB’s 2% target, possibly inducing a self-reinforcing process.
Pushing back on these worries, Lane argued that underlying inflation surged as high energy costs had to be priced into the cost of everything from goods to services, a process that is bound to reverse now that gas prices are back at pre-war levels.
“I don’t think it’s symmetric… but when energy prices fall, core inflation does follow, because there is less pressure from an energy cost, there’s less pressure on the cost of living, therefore on nominal wage increases,” Lane told a conference.
“So, we do think this spectacular reversal of energy prices will feed into lower core, but the timeline for that and the scale of it is uncertain,” he added.
Speaking on Thursday, Dutch central bank chief Klaas Knot warned that underlying inflation, the ECB’s main concern now, is not yet showing signs of abating, particularly in the services sector.
“As monetary policymakers, we need to be assured that we also see a meaningful reversal in underlying inflation,” Knot said.
Boris Vujcic, Croatia’s central bank chief, also voiced some skepticism about disinflation, arguing on Friday that he had doubts that the ECB could get inflation back to 2% within the next two years.
Lane also pushed back on worries that nominal wage growth is getting too high for comfort and could also reinforce inflation.
“On average, wages are rising in a very moderate way; many people are still locked into old contracts,” Lane said. “The latest deals are coming in at above 5%, but (this is in the) ballpark of what we expect.”
Nominal wage growth is set to peak this year and it will still take real wages until 2025 to rise back to their 2019 level, he said.
(Reporting by Balazs Koranyi; Editing by Sharon Singleton and Toby Chopra)
