ECB Stresses Current Inflation Hump Shaped Not Stagflation

ECB accounts of its October monetary policy meeting addressed a lot of key questions. The big one, is inflation transitory and are we headed for stagflation? The Bank recalled that stagflation experiences in the 1970s occurred in a different environment, in which indexation allowed wages to react to energy prices.

European Central Bank

The shortage of critical supplies including energy and other commodities has “seen market-based measures of inflation compensation in the euro area had surged to their highest levels in over seven years, pushing long-term nominal sovereign bond yields back to levels seen earlier in the year.

In the euro area, ten-year inflation swap rates were more than 30 basis points higher than in September 2021 and a full percentage point higher than in December 2020, when the Governing Council had pledged to preserve favourable financing conditions, : The ECB wrote in their accounts.

Highlights of the October ECB Monetary Meeting

October ECB Meeting:

ECB left rates unchanged as expected in October. The bank left deposit facility interest rates at -.50% and held steady rates on the main refinancing operations and on the marginal lending facility unchanged. ECB again judges that favorable financing conditions can be maintained with a moderately lower pace of PEPP purchases

Account of the monetary policy meeting of the Governing Council of the European Central Bank held in Frankfurt am Main on Wednesday and Thursday, 27-28 October 2021

  • Normal for the latter stages of a recovery to be accompanied by lower growth
  • Most of the recent upward pressure on prices was coming from base effects
  • It was stressed that the current outlook clearly lacked the stagnation element
  • Growth momentum was declining, but within a still strong recovery
  • It was recalled that stagflation experiences in the 1970s occurred in a different environment, in which indexation allowed wages to react to energy prices
  • Members broadly agreed with the assessment by Mr Lane in his introduction i.e. inflation expected to decline in the course of 2022
  • Members widely agreed on the expected hump-shaped pattern in the shorter-term inflation outlook
  • Confidence was expressed that the effects of higher energy prices and of supply bottlenecks would be temporary, although the decline in inflation in 2022 would now take longer than previously expected
  • Broad agreement among members that the key question at the current juncture was what the latest developments implied for the medium-term inflation outlook
  • Members considered that an increase in inflation in the medium-term required higher wage growth and inflation expectations
  • The view was widely shared that negotiated wage growth had remained subdued and there were no signs as yet of second-round effects on wages
  • Concerns were voiced that expectations regarding the future path of short-term money market interest rates were difficult to reconcile with ECB’s forward guidance
  • It was stressed that ECB had to reaffirm all three conditions of its forward guidance and its determination to act forcefully and persistently
  • Members concurred that the current and near-term increase in inflation was driven largely by temporary factors that would fade in the medium-term

Some sanguine points from the ECB with regards to wages:

Some catching-up was to be expected and, coming after a long period of low inflation, a pick-up in wage growth driven by tightening labour markets – even if sustained – should be considered a healthy development. Moreover, in terms of the consequences for labour costs, any rise in wage growth would have to be weighed against productivity growth. Generally, the materialisation of second-round effects in response to a terms-of-trade shock depended on the competitive situation and the relative bargaining power of workers and employers.

Source: ECB

From The TradersCommunity US News Desk