Lagarde: 4% euro inflation is mostly energy, no second-round effects, no December pledge
Serguey Asael Shinder2 min readThe ECB published on 7 November an interview that President Christine Lagarde gave to Hironari Akiyama of Yomiuri Shimbun on 4 November. Most of the monetary policy discussion was about why headline inflation reached 4% in October, higher than the ECB had expected a few months earlier but in line with market expectations.
Lagarde put it largely down to energy. Energy inflation rose to 20.8% in October from 18.9% in September, which she attributed to the conflict in the Middle East and lower global refinery capacity, and food inflation also increased. Underlying measures were stable: core inflation, excluding energy, food, alcohol and tobacco, stayed at 2.5%, while services inflation edged up to 3.3%, within the range of the past four months. She warned that inflation will stay high in coming quarters and that the higher and longer it stays, the greater the risk to the medium-term target.
On second-round effects she said the ECB sees none beyond what its projections already include, based on multi-year wage agreements and firms' wage expectations. She declined to pre-empt the December forecast but noted that energy futures and long-term rates are higher than at the time of the September projections, although oil prices have eased recently. On December itself she repeated that decisions are taken meeting by meeting, and that on current information it would take significant changes for the direction of travel to differ from what she expects.
Looking back at 2021, Lagarde said central banks including the Fed, the Bank of England, the Bank of Japan and the ECB had all judged the energy shock transitory, which was misguided because demand was rebounding at the same time. Asked about France, she said long-term yields have risen worldwide because of geopolitical inflation, heavier sovereign issuance and competition for financing between governments and AI companies, and that high-debt member states are more sensitive to that rise.
What it means
The message is that the ECB reads October's 4% as an energy shock with stable core underneath, but has learnt not to wave such shocks through. Wage data and the December projections will decide whether that reading holds.