Philip R Lane: Inflation in the near-term and the medium-term

Opening remarks by Mr Philip R Lane, Member of the Executive Board of the European Central Bank, at the Market News International (MNI) Market News Webcast, Frankfurt am Main, 17 February 2022.

The views expressed in this speech are those of the speaker and not the view of the BIS.

In these brief opening remarks, I wish to discuss the forces shaping near-term and medium-term inflation dynamics.

On near-term inflation, I emphasised in a blog post last week that the current high inflation rates have been largely shaped by a pandemic cycle that has generated global bottlenecks for manufactured goods over the last year and, most importantly for the euro area, has seen a very substantial surge in energy prices in recent months.

A comprehensive analysis of the implications of high energy prices for near-term and medium-term inflation dynamics should take into account four factors: first, the direct impact through the energy component of the HICP; second, the indirect impact, since energy is an important input for many other components of the HICP, such as food, transportation, goods and many consumer services; third, the potential for second-round effects on wages, with due differentiation between a one-off or catch-up wage adjustment and a revision in inflation expectations that would have persistent effects on wage growth; and, fourth, the macroeconomic impact, with high energy prices operating through negative income and wealth effects, while also affecting energy-sensitive production and investment plans. At a global level, the macroeconomic impact of an energy shock differs between energy-producing and energy-using regions. Since the euro area is a significant net importer of energy, a surge in energy prices constitutes a significant adverse terms of trade shock. Higher import prices for energy reduces the disposable incomes of households and the cash flows of energy-intensive firms. The impact of this terms of trade shock on euro area macroeconomic dynamics will warrant close monitoring in the coming quarters.