ECB underestimated inflation

EZB President Christine Lagarde admitted at an online event of the Davos World Economic Forum that the European Central Bank had underestimated inflation – like other institutions, however. Now, however, Europe’s currency watchdogs are assuming falling inflation rates in the current year. However, the outlook is “afflicted with great uncertainty”: “So that doesn’t mean that we don’t have to be open to changes in the inflation outlook,” said the ECB President.

The ECB does not currently see a wage-price spiral that could drive inflation further. Inflation in Europe is also not “out of control”. “On the contrary,” Lagarde said, “we expect energy prices to stabilize over the course of 2022 and then inflation rates will gradually come down.”

Waiting for ECB March forecasts

“We will have new projections in a few months,” said Lagarde, referring to the central bank’s new forecasts for inflation and the economy in the euro area, which are expected for March. Many economists expect the inflation rate to fall in January, but it is unclear how strong and how high it will be in the further course of the year.

“These projections could be different and at that point we will need to look at our roadmap,” Lagarde said. The comments could be a sign that the ECB will remain dovish at its February meeting in two weeks’ time – and will not make any further decisions until March. Referring to the central bank’s inflation target, Lagarde emphasized: “We will act as soon as the criteria are met, but at the moment they are not met.”

“Central bankers are sleeping at the wheel”

At the event, Kristalina Georgieva, Managing Director of the International Monetary Fund (IMF), warned of inflationary risks in the United States and high debts in emerging and developing countries. She agreed with Lagarde that inflation is currently being driven not only by the economic recovery and supply shortages, but also by geopolitical factors. “50 percent of inflation comes from higher energy prices,” Lagarde said.

The Brazilian economy minister, Paulo Guedes, criticized the behavior of the central banks. “Inflation will not be transitory at all, that is, temporary,” he said. “Central bankers are sleeping at the wheel.”

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