Inflation should keep going down in the Eurozone in the coming months thanks to falling energy prices and rate hikes, but “considerable uncertainty” remains, ECB President Christine Lagarde warned on Friday.
“We expect euro area inflation to continue to fall,” Ms. Lagarde said in a speech to the IMF and World Bank spring meetings, published on the ECB’s website. However, “this outlook remains surrounded by considerable uncertainty,” she warned.
After a spike last year, linked to higher energy prices and the post-Coronavirus recovery, inflation has been falling since Autumn 2022 in the euro area, thanks to a lull in energy markets and a decline in supply tensions.
Mixed outlook
This movement is set to continue “as lagged price pressures fade out and tighter monetary policy increasingly dampens demand,” Ms. Lagarde said. However, historic wage growth, linked to low unemployment and inflation offsets, should continue to support inflation, she cautioned.
The ECB remains cautious about future prospects because of the many risks, both on the upside and the downside. “Stronger-than-expected pipeline pressures or higher-than-expected increases in wages or profits could drive up inflation,” the ECB head warned.
While energy prices are falling, food prices continue to rise; on the other hand, tensions on financial markets and falling energy prices could lead to faster disinflation, according to Ms Lagarde.
ECB target of 2% inflation unlikely to be met before 2025
The ECB chief exercised similar caution with regard to economic activity, noting that the prospects for recovery remain fragile in a context of persistent uncertainty.
Despite a five-month decline, inflation remains very high in the euro zone, at 6.9%.
The ECB does not expect a return to its medium-term target of 2% until 2025. To counter inflation, the institution has already raised its key rates by 3.5% since July and does not intend to stop there.
