Is high inflation a global phenomenon, as America’s Federal Reserve Chairman Jerome Powell recently said? That would possibly relieve the individual countries and central banks a little, at least mentally. A joint event organized by the Atlantic Bridge and Atlantic Council organizations on Wednesday in Frankfurt therefore took a closer look at inflation on both sides of the pond. “We have inflation around the world – even in Japan, where it has long been very low,” ECB President Christine Lagarde said in an interview with Maria Demertzis of the Brussels think tank Bruegel.
But there are differences in shape and height. “It has to do with the causes, the roots of inflation.” There are two main differences between inflation in the United States and the euro zone. One is related to energy, the other to work. First, in Europe, energy is the key driver of inflation. The prices for electricity, gas and fuel made up 60 percent of the inflation drivers in the euro area. “In America, it’s half of that.” Second, wages in America have risen significantly more. The increase in wages there is 5 to 7 percent, in the euro area the collective wages have so far only increased by 2.5 to 3 percent.
There are also differences with regard to the question of whether inflation is driven more by supply or demand. “Our inflation is very supply-driven,” Lagarde said. Supply bottlenecks and supply chain disruptions would have caused prices to rise. “In America, inflation is more demand-driven.”
“Monetary policy cannot lower the gas price”
That has consequences for how the central banks deal with it. Demand-driven inflation is easier to fight with interest rate hikes – supply-driven inflation is more complicated. “Monetary policy cannot lower gas prices or end the war, although I would like to,” Lagarde said. It is now important to avoid “unanchoring”, i.e. a sharp increase in inflation expectations. Second-round effects, including a wage-price spiral, could influence the central bank better than first-round effects.
The ECB President admitted that the central bank made mistakes in forecasting inflation, “like many forecasters, maybe because we had the same forecasting models.” But a year and a half ago, inflation was minus 0.3 percent, now it’s 9 .1 percent. When inflation started to rise, there was a “general consensus” that this was only “transitional”.
“We will do what we have to do”
In the meantime, it has reached a permanence and level that nobody expected. The task of the central bank is now the return to price stability. “We will do what we have to do,” Lagarde promised. Also in the event of a recession: “If we don’t act, it would hit the economy even harder.” Lagarde confirmed that after the interest rate hike of 0.75 percentage points in September, further interest rate hikes should follow in the next few meetings.
Lagarde was also asked what the ECB could do to give the euro more weight against the dollar as an international currency. Among other things, she mentioned the deepening of the European capital market – in her opinion, common European government bonds would be advantageous for this, but establishing this is of course not the task of the ECB. Regarding the planned introduction of a digital euro, Lagarde reiterated that it should not replace cash. She pointed out, “I love banknotes.”