FRANKFURT, June 3 (Reuters) – It is not a given that the current inflation shock facing the euro zone will be more benign than the 2022 episode, as some initial conditions flag larger inflationary risks, a blog post written by senior ECB economists argued on Wednesday.
Euro zone inflation jumped to 3.2% last month, far above the 2% target, as the war in Iran pushed energy prices sharply higher, with some of this increase now seeping into the broader economy via services.
This has made a small rate hike later this month almost certain but few expect aggressive policy tightening thereafter on the premise that current conditions are not conducive to a rapid acceleration in price growth.
While the blog authors, who include Óscar Arce, the head of the ECB’s economics directorate, confirmed this premise, they argued that the risk was more balanced.
“Some features point towards lower inflationary risks now than they did in 2022,” the blog, which is not necessarily the ECB’s view, argued. “That said, a number of other initial conditions flag larger inflationary risks now compared with 2022.”
The price shock predominantly affects oil, and gas prices have stayed much lower, which also keeps electricity prices down, helped by the spread of renewables production.
In addition, household demand is weaker, the labour market is softer and both fiscal and monetary policies are tighter than at the start of the last shock, all limiting factors for an inflation take-off.
However, the current shock is more global in nature than the 2022 episode, which raises the risk of strong non-linear amplification, if it proved larger, broader or more persistent than currently expected.
“A global shock has larger indirect effects on inflation, as cost pressures build more broadly along global value chains,” the authors argued. “This, in turn, causes import prices to rise more sharply and the energy price shock to transmit stronger to the domestic economy.”
Plus, households may adjust their mindset to higher inflation more quickly, given the recent experience with surging prices, and governments also have less fiscal room to cushion price growth, they said.
(Reporting by Balazs Koranyi; Editing by Toby Chopra)
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