The European Central Bank has not yet won the match against high inflation, with the 2% target not expected to be reached before the end of 2025, its president Christine Lagarde warned on Monday. Inflation in the euro zone was reduced to 2.6% year-on-year in May – after peaking at 10.6% in October 2022 – which led the monetary institution to reduce its rates in June for the first time since five years. Nevertheless, “We will not rest until the game is won and inflation is back to 2%”the ideal rate targeted for the medium term, declared Christine Lagarde at the opening of an annual ECB forum organized in Sintra, Portugal.
“Our work is not finished and we must remain vigilant”she warned at the beginning of her speech. Given the unprecedented scale of the inflationary shock since the start of the euro, “a soft landing in 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.
Persistent uncertainties
If the post-Covid-19 crisis shortages of goods, a factor of inflation, seem to have subsided, and the rise in energy prices in the wake of the Russian war in Ukraine no longer weighs as much, “we still face several uncertainties regarding future inflation”, according to the central banker. She cited in this regard “the evolution of the link between profits, wages and productivity”when employees obtain salary increases to make up for lost purchasing power, and “the question of whether the economy will be hit by further supply-side shocks”without specifying their nature.
The ECB is indeed forecasting a bumpy ride for inflation in the coming months, with potentially higher energy prices and prices in services influenced by the high wage component. However, as already communicated in June, inflation should again reach 2% “at the end of next year”she added. The unprecedented tightening of the ECB’s monetary policy, which increased rates by 450 basis points between July 2022 and September 2023, has prevented a drop in inflation expectations among economic agents, Christine Lagarde welcomed.
