Euro zone inflation rise may be more than 'transitory gust', ECB's Schnabel says

FRANKFURT (Reuters) – A sudden, sharp rise in euro zone inflation may prove durable if workers start expecting higher prices and demand wage increases, European Central Bank board member Isabel Schnabel said.

FILE PHOTO: The skyline with the banking district and the headquarters of the European Central Bank (ECB) are photographed in Frankfurt, Germany, October 4, 2021. REUTERS/Kai Pfaffenbach

Schnabel repeated the ECB’s official line that a spike in prices, which are estimated to have risen 3.4% year on year in September according to Eurostat, would subside next year.

But she joined a growing number of policymakers flagging the risk that this may not happen.

“It would be premature to assert that current price dynamics will fully subside next year,” she told a joint conference organised by the ECB and the Cleveland Federal Reserve.

“There are several sources of uncertainty that might entail more persistent inflationary pressures.”

Among them, she listed potential changes in inflation expectations and in people’s behaviour when it comes to setting wages and prices.

“As we form our assessment of the medium-term inflation outlook, we keep our finger in the wind to determine whether the breeze will turn out to be more long-lived than just a transitory gust,” Schnabel said.

So far, however, there was “no indication” in market prices and in economists’ forecasts that higher inflation would become entrenched, the German economist added.


Accounts of the ECB’s latest policy meeting showed on Thursday that policymakers had already started worrying about upside risks when they met on Sept 8-9.

“Risks to the inflation outlook… were widely regarded as being tilted to the upside,” the accounts stated, with policymakers arguing that the ECB must keep an eye on a possible inflation “regime shift”.

ECB chief Christine Lagarde played down inflation fears at a news conference after the meeting but has since struck a more balanced tone while many of her colleagues have flagged their concerns in private and public conversations.

New ECB forecasts unveiled at the meeting put inflation at 2.2% this year, 1.7% next year and 1.5% in 2023.

But policymakers at the gathering also wondered whether their projection models were working properly given the big inflation overshoots this year.

“This raised doubts about how well the models relied on in the projections were able to capture what was currently happening in the economy, the structural changes implied by the pandemic and the impact of the ECB’s new monetary policy strategy,” the ECB said.


The rate setters also debated a bigger cut in their monthly pace of their Pandemic Emergency Purchase Programme (PEPP).

“It was argued that a symmetric application of the PEPP framework would call for a more substantial reduction in the pace of purchases,” the ECB said. “From this perspective, a pace of purchases similar to the level prevailing at the beginning of the year would be appropriate.”

Some policy hawks went even further, arguing that markets had already prepared for the end of emergency purchases without a significant impact on financing conditions, so investors were well-prepared.

“The argument was made that markets were already expecting an end to net asset purchases under the PEPP by March 2022,” the accounts showed. “The point was made that, even without the PEPP, the overall monetary policy stance remained highly accommodative.”

In the end, the ECB opted for a more cautious move, simply deciding to cut their emergency bond buys “moderately” for fear of upsetting the markets.

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