May 19, 2024

Westside People

Complete News World

Inflation is proving persistent as it moves through the Eurozone economy

Inflation is proving persistent as it moves through the Eurozone economy

The nature of the eurozone’s inflation problem is changing, and interest rates will need to be higher for longer than policymakers and investors once believed, Christine Lagarde, president of the European Central Bank, said on Tuesday.

While the shocks that pushed the region’s inflation rate above 10 percent late last year, such as supply chain bottlenecks during the pandemic and energy price hikes after Russia’s invasion of Ukraine, are beginning to fade, their impact is still rippling through the economy. This makes inflation more persistent, Lagarde said at the Central Bank’s 10th annual conference in Sintra, Portugal.

The slower decline in inflation “is caused by the fact that inflation works its way through the economy in stages, as different economic agents try to pass costs on to each other,” Lagarde said. Companies have passed costs on to customers, and workers are now trying to make up for lost wages due to higher prices.

Central bankers from across Europe and further afield, from Canada to South Africa — including Jerome H. Powell, chair of the Federal Reserve, and Andrew Bailey, governor of the Bank of England — gathered in Sintra at a challenging time for policymakers as they battle to cut inflation without causing undue economic pain.

Central banks around the world have aggressively raised interest rates, and while the full impact of these moves has not yet been felt across economies, policymakers are trying to determine if they have an inflationary handle.

The European Central Bank, which sets policy for the 20 countries that use the euro, raised interest rates this month to their highest level since 2001 and said more increases were likely to follow. Consumer prices in the euro area rose 6.1 percent in May from a year earlier, the slowest pace in more than a year.

See also  Stock futures are flat as traders look forward to the November wholesale sales inflation report

But policymakers remain concerned about core inflation, which excludes food and energy prices and is one way to gauge how deep price pressures are in the economy. This measure fell to 5.3 percent in May from 5.6 percent in the previous month.

Lagarde said on Tuesday that the central bank “would have to raise interest rates to sufficiently restrictive levels and keep them there for as long as necessary.”

She added that for eurozone inflation to return to the central bank’s 2 percent target, companies would have to absorb higher wage costs and accept lower profit margins.

Last year, she said, companies were able to pass on higher costs quickly, in part because customers couldn’t tell whether the higher prices were a result of the company’s higher costs or a pursuit of greater profits. Therefore, profits contributed about two-thirds to domestic inflation, compared to an average of one-third over the past two decades.

Workers are now seeking higher salaries to replace their lost purchasing power. The central bank expects wages to rise 14% by the end of 2025 as they return to pandemic levels, once adjusted for inflation.

Lagarde said inflation could be brought down, and workers could make up for some lost wages, if monetary policy was restrictive enough. For this to work, policy needs to constrain the economy by reducing demand so that firms cannot fully pass on the cost of higher wages to their customers. If this does not happen, inflation will remain stubbornly high.

Lagarde said the central bank will need “more consistent policy” to address signs of prolonged inflation. This means keeping interest rates at restrictive levels until policy makers are sure of the catch-up problem.

See also  Dow futures: Market slips as leaders could have cracked; Tesla, New News looming

“We’ve made great progress,” said Ms. Lagarde. “But in the face of a more persistent inflationary process, we cannot hesitate, we cannot yet declare victory.”

She added that the central bank would not be able to say with confidence in the near term whether interest rates had peaked.

The night before, central bankers received a stern warning from the International Monetary Fund. “Inflation is taking a long time to return to target,” Gita Gopinath, senior deputy director-general of the organisation, said in a speech.

Ms Gopinath set the tone for the conference, which runs until Wednesday, arguing that central banks need to press ahead to bring down inflation, despite the economic costs.

Even with the measures taken by global central banks, Gopinath said, “the fight will not be easy.” “Fiscal pressures may intensify, and growth may have to slow further.”