ECB’s chief economist says inflation will fall later this year

Inflation is set to come down this year with current high rates part of a “pandemic cycle of inflation”, the European Central Bank’s chief economist has said.

Data from Eurostat shows inflation across the Eurozone rose to 5% in December, a new high for the 19 countries using the single currency.

In Ireland, the rate hit 5.7% last month, with energy costs in particular hitting consumers in their pockets.

The ECB’s Philip Lane said that while surging energy prices are “a major concern”, they anticipate inflation rates will come down this year, and continue to decrease in 2023 and 2024.

“In this year inflation is going to come down. It’s going to be above where we want it to be in the long term,” he told RTE.

“But this three-year period – 2020, 2021, 2022  – is basically part of a pandemic cycle, if you like, of inflation.

“So in that sense, it should not be, I think, interpreted in terms of compared to historical norms. The pandemic is a unique episode.

“Only a few weeks ago in our December meeting, we looked at the prognosis for this year, for 2023, 2024.

“Our analysis is that inflation this year will be coming down in 2022.

“And, in fact, we project inflation to be a little bit below our target in 23/24.

“So, yes, we hear numbers like 5% in December 2021. That sounds so strange after a long period of low inflation.

“But again, to repeat, we do think this year the inflation pressures will be easing over the course of this year and in fact, we think inflation in 23, 24 will be a little bit below where we would like it to be in terms of our targets.”

Rising energy costs have been at the core of the soaring inflation rate.

Analysis by price comparison website Bonkers.ie has shown that price hikes could increase the annual household energy bill by as much as 1,300 euro.

Mr Lane, a former governor of the Central Bank of Ireland, said he expects pressure in the energy sector to ease this year.

But Europe’s position as a major importer of energy and external geopolitical factors add uncertainty to the mix.

“The fact that energy prices have risen so much is a major concern,” he said.

“The European economy is a major importer of energy. Collectively Europe, by paying so much more for energy inputs, this is a major economic issue.

“Now, the fact that prices have risen so much does mean, compared to last year’s rate of increase, there’s probably less upside this year.

“But there are factors we need to look at, geopolitical issues among them for sure.

“On the other hand, what we do think is supply pressures should ease in the aggregate this year.

“In the oil markets, we think supply pressures will ease, but as you indicated, the gas market is quite important for energy in Europe, and there are all sorts of different dynamics going on there.

“But I would remind you, of course, that supply responses are happening there as well in terms of, for example, the shipping of liquefied natural gas around the world, it’s being redirected to Europe.

“So we will keep an eye on this. It’s a very important issue, but it’s much broader than the ECB issue. The fact that energy prices have gone up so much is a major economic policy issue in general.”

Mr Lane also said that he did not anticipate that the ECB would make changes to borrowing rates, which have hit historic lows in recent years.

“When we think the high inflation is not going to be durable, the case for altering our interest rate policy is not there,” he said.

“But of course, let me repeat, we will have new data coming in all year long and you can expect the ECB to pay a lot of attention to all of that data.”