Inflation is no longer temporary, it’s even here to ‘last’, warns Christine Lagarde (ECB)

The tone has changed. Christine Lagarde, head of the European Central Bank (ECB), seeing this as “temporary” and urging “not to overreact” just six months ago, adapted her vocabulary. And it was not in vain that Russia invaded Ukraine there. This leads to a sharp increase in the prices of raw materials, gas, oil, copper and aluminum, as well as many foodstuffs. That threatens economic activity and the ability of many states to supply their population.

Therefore, the President of the ECB this Thursday, March 17, calculated that the surge in prices will leave its mark and that inflation will not return to the low levels that existed before the pandemic and the war in Ukraine.

“We are increasingly convinced that the dynamics of inflation in the medium term will not return to the pattern that we observed before the pandemic,” when the indicator consistently stayed below the ECB’s target of 2%, Christine Lagarde said.

The monetary institution has just raised its inflation forecast for 2022 to 5.1% in the euro area. Prices rose 5.8% year-on-year in February due to soaring energy prices and bottlenecks in supply chains. A record level since the European Statistical Office measured it in 1997.

Inflation: prices in Europe and the US are rising and are not going to fall

Long term impact

The growth of inflation should not be limited to the short term. “The upward impact may continue for some time”, warned the former French minister, referring to goods whose prices change less frequently than energy. The ECB currently projects inflation to fall to 2.1% in 2023 and then to 1.9% in 2024. In the medium term beyond 2024 “more and more stabilizing around our 2% target”.

the ECB should “manage a shock that would, in the short term, push inflation above our target and dampen growth,” warned the president of the ECB. The Eurozone growth forecast was revised down last week to 3.7% for 2022 due to the impact of the armed conflict in Ukraine on global activity.

Global growth: post-COVID rebound risks being halted by war in Ukraine

Inflation in France will exceed 4% according to INSEE

According to INSEE, the current inflation in France is “heated up” by the war in Ukraine. It hit 3.6% in February (a 0.8 point increase this month alone), a level not seen since 2008. This confirms the latest estimates of the Bank of France, which were announced on Sunday, March 13, between 3, 7 and 4.4% inflation. for 2022 in France. There is no more doubt: the war in Ukraine is raging, and China is rebuilding, promising to undermine our global economy even more, and inflation will not go anywhere.

Russia’s war in Ukraine sparks ‘confidence shock’ for French businesses and households (Insee)

INSEE also predicts it will rise above 4% in March and hover around 4.5% in the second quarter, driven by energy, raw material and food prices. However, these forecasts are based on the assumption of an oil price of $125 per barrel, i.e. its level, reached at the very beginning of March, but has since dropped, INSEE specifies.

Among the recommended measures to respond to the crisis, the Organization for Economic Co-operation and Development (OECD) recommends budgetary assistance “target” sectors most affected by the price shock, which could be financed, in particular, through “taxation of windfall income in some countries”. Several states have announced measures to combat rising prices: in France, in addition to “tariff shield” and discounts on fuel, on Wednesday the government unveiled its “resilience plan,” a set of measures to support businesses affected by the effects of the war in Ukraine.

Ukraine: French government draws up resilience plan with yet vague outlines

Central banks are trying to cope

For all central banks, the war in Ukraine presents a new dilemma: the disruption of the market for energy and other commodities (wheat, aluminum) drives up prices, exacerbating inflation, which was already accelerating so sharply before the conflict. They have to choose between maintaining ultra-loose monetary policy, at the risk of seeing inflation for a long time, or raising their rates, which affects the creditworthiness and credit of both individuals and companies.

The European Central Bank, for its part, “started to adjust” its monetary policy in order to “normalization”, this means that it will very gradually phase out its accommodative policy of asset purchases and low rates as soon as “conditions will be met”, according to Christine Lagarde. The ECB will decide on the exact timing of this adjustment depending on “Economic Consequences of the War”. Last week, the institution decided to accelerate the cut in net asset purchases that began in 2015, when inflation remained well below 2%. Once these net repayments are reset, possibly in the third quarter, the ECB will focus on its key rates, a traditional monetary policy tool, which remain at their lowest levels since 2011.

Bank of France predicts less growth and more inflation due to war in Ukraine

In the United Kingdom, the Bank of England (BoE) raised interest rates on Thursday 17 March by 0.25 percentage points to 0.75% (pre-pandemic) to counter inflation, which it says could top 8% in 2022 . This is the third time in a row that she has tightened her policy. She justified her decision by saying “labor market tightness, lingering signs of inflationary costs and pressures, and the risk of them continuing.” Inflation has already reached 5.5% in January, well above the Bank of England’s target of 2%. “Inflation will continue to rise in the coming months, to about 8% in the second quarter of 2022 and possibly even higher at the end of the year,” she warns.

In the United States, the US central bank also opted for a cautious quarter-point hike, now setting its rates in a range of 0.25% to 0.50% after holding them between 0% and 0.25 for two years. %. This is the first time since 2018. “We will take the necessary steps to prevent high inflation from taking root by maintaining a strong labor market,” Fed Chairman Jerome Powell assured, acknowledging, however, that it would be necessary ” more time “ Inflation is expected to return to the 2% target. The Fed now expects inflation at 4.3% in 2022, nearly double the last December forecast. 2.7% is expected in 2023 and 2.3% next year.

Fed starts raising rates to fight inflation

(with AFP)