Anticipates Temporary Increase in Inflation According to ECB
The European Central Bank (ECB) has forecasted higher prices in the coming months, but these increases are expected to be temporary and have minimal impact on medium-term inflation dynamics. According to ECB's chief economist, Philip Lane, temporary factors such as supply bottlenecks and short-lived disruptions are causing the short-term price rises.
Lane's analysis, supported by recent research, distinguishes between types of supply shocks. Global value chain disruptions are likely to generate more persistent and broad-based price pressures, while energy and domestic supply shocks tend to produce more transitory effects. These temporary factors lead to transitory inflationary pressures that are offset over time by adjustment mechanisms, resulting in a cooling down of demand and more balanced supply.
The ECB continues to emphasize the importance of coordination in the fiscal response of the euro area. The fiscal response must be appropriately coordinated to ensure favorable financing conditions, which are crucial for inflation to return.
In 2022, the ECB expects inflation in the euro area to fall to 1.2 percent. The bank predicts that inflation will rise slightly in 2023, reaching only 1.4 percent. Employment prospects are viewed as very uncertain, and wage developments in 2021 are anticipated to remain subdued.
In summary, temporary supply-side disruptions cause short-term price rises but are largely offset in the medium term by increased supply and adjusted demand, implying that medium-term inflation dynamics are less affected by these transitory factors. The ECB projects the medium-term price increase to remain muted.
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