The end of the game against high inflation is still far from being whistled in the eurozone. The 2% target will not be reached before the end of 2025, warned the president of the European Central Bank Christine Lagarde on Monday.
Eurozone inflation fell to 2.6% year-on-year in May – after peaking at 10.6% in October 2022 – leading the monetary institution to cut rates in June for the first time in five years.
“We must remain vigilant”
Nevertheless, “we will not rest until the game is won and inflation is back to 2%,” the ideal rate targeted for the medium term, Christine Lagarde said at the opening of an annual ECB forum in Sintra, Portugal. “Our work is not done and we must remain vigilant,” she warned at the start of her speech.
Given the unprecedented scale of the inflationary shock since the start of the euro, “a ‘soft landing’ for inflation is still not guaranteed,” according to the former IMF managing director.
While deciding on a first rate cut – widely anticipated – in June, taking them from their historic high, the ECB warned then that the future would be uncertain due to the volatility of inflation.
While the post-Covid-19 goods shortages, a factor in inflation, seem to have been resolved, and the rise in energy prices in the wake of the Russian war in Ukraine is no longer as heavy, “we are still facing several uncertainties regarding future inflation,” according to the ECB chief. She cited in particular in this regard “the evolution of the link between profits, wages and productivity,” at a time when employees are obtaining wage increases to make up for lost purchasing power.
Towards potentially higher energy prices
The ECB is indeed predicting a bumpy path for inflation in the coming months, with potentially higher energy prices and service prices influenced by the strong wage component. However, as already communicated in June, inflation should reach 2% again “at the end of next year”, Christine Lagarde added.
The unprecedented tightening of the ECB’s monetary policy, which increased rates by 450 basis points between July 2022 and September 2023, has made it possible to avoid a drop in inflation expectations among economic agents, the president of the monetary institution further noted.
