The euro-area inflation shock drags on at 3.3 per cent, above target
Christine Lagarde, who heads the European Central Bank, put inflation in the euro area at 3.3 per cent, far above the bank's own 2 per cent target, in an interview with Ouest-France, a French regional paper. She said the shock was lasting longer than expected and named its sources: the conflict in the Middle East and refining capacity destroyed across the world, above all in Russia. Energy costs, on her account, drag every other price up, and a resilient economy obliged the bank to react.
Economics & Markets··Evening
Inflation runs well clear of the 2 per cent target
Christine Lagarde, who heads the European Central Bank, the institution that runs monetary policy for the euro area, described inflation in the bloc at 3.3 per cent, far clear of the 2 per cent target. She spoke to Ouest-France, a French regional daily, in an interview that appeared on 12 September. The 2 per cent figure is the bank's own inflation target, which is what turns the distance from it into a policy question. In her account this is no passing wobble: a large shock is pushing prices up, and it is running longer than expected.[1]
Conflict and lost refining capacity
The shock has two sources in Lagarde's account: the conflict in the Middle East, and refining capacity destroyed across the world, above all in Russia. Refining capacity is the volume that plants turning crude oil into petrol and diesel can process, and fuel gets dearer when that volume shrinks. The rise in energy costs, she said, does not stay inside one spending heading; it pulls every other price up with it. That the conflict is still running is the reason she declines to treat the shock as short-lived.[1]
The growth risk and the reason to act
Lagarde accepted that raising rates can put growth at risk when a shock is short-lived. She then set that objection aside for the present case, saying the current shock is lasting longer and the conflict has not stopped. The euro-area economy, in her description, is resilient, and that is why the bank was obliged to react. The interview rests the bank's reasoning on a single measure: how far inflation is sitting from the target.[1]
