Inflation in the euro area is likely to remain elevated for longer than previously expected, but will decline in the course of this year, European Central Bank (ECB) president Christine Lagarde said.
“Compared with our expectations in December, risks to the inflation outlook are tilted to the upside, particularly in the near-term,” said Lagarde while addressing a hearing of the European Parliament’s Committee on Economic and Monetary Affairs on Monday.
“If price pressures feed through into higher-than-anticipated wage rises or the economy returns more quickly to full capacity, inflation could turn out to be higher,” she warned.
Lagarde stressed that recent data confirms a moderation in the momentum of growth due to the spread of the Omicron variant. Measures imposed to deal with Omicron have dampened activity, particularly in consumer services such as travel, tourism, hospitality and entertainment.
Quarterly growth in the eurozone slowed to 0.3 per cent in the final quarter of 2021, but nonetheless, this still allowed for the gross domestic product (GDP) to recover to its pre-pandemic level.
The current pandemic surge and related restrictions are likely to continue to negatively impact growth earlier this year, Lagarde said.
Supply bottlenecks and high energy costs are also expected to dampen economic activity in the short term.
Inflation has risen sharply in recent months and is likely to remain high in the near-term, mainly driven by the price of energy, she explained.
“Energy prices continue to be the main reason for the elevated rate of inflation. Their direct impact accounted for over half of headline inflation in January, and energy costs are also pushing up prices across many sectors. Food prices have also increased, owing to seasonal factors, elevated transportation costs and the higher price of fertilizers. In addition, price rises have become more widespread, with the prices of a large number of goods and services having increased markedly,” she said.
Valdis Dombrovskis, European Commission (EC) Executive Vice President for an Economy that Works for People, also said the surge in energy prices was “a serious concern”, mentioning the impact it is having on the most vulnerable households and small and medium-sized enterprises (SMEs).
Dombrovskis confirmed Lagarde’s statement that inflation is now expected to remain elevated, adding that price pressures are having an impact on people’s purchasing power and growth.
“It is important that the spike in inflation does not become entrenched,” he said.