Senior economists at the European Central Bank wrote Wednesday that the recent inflation surge in the euro zone presents a more balanced risk profile than the 2022 episode in some respects, while warning that other initial conditions point to heightened inflationary risk.
Euro zone inflation climbed to 3.2% last month, above the ECB's 2% target. The economists attribute the rise in large part to a jump in energy prices connected to the war in Iran, with the effects now extending beyond energy into the services sector.
That acceleration in prices has all but locked in a small interest-rate increase later this month. Observers quoted by the economists expect only limited further tightening after that, noting that present conditions do not look conducive to a rapid re-acceleration of price growth.
The blog post authors, among them Óscar Arce, who heads the ECB's economics directorate, endorsed the view that the immediate policy response is likely to be modest, while stressing that the piece does not necessarily reflect the ECB's formal stance.
"Some features point towards lower inflationary risks now than they did in 2022,"
the post said, before cautioning that
"That said, a number of other initial conditions flag larger inflationary risks now compared with 2022."
The economists noted important differences in the composition of the current shock. At present, the price spike is concentrated mainly in oil. Gas prices have stayed substantially lower, a factor that has helped keep electricity prices subdued. The expansion of renewable energy production also has played a role in containing some costs.
Several demand-side and policy-side elements are seen as limiting the potential for runaway inflation. Household demand is weaker and the labor market appears softer than was the case at the start of the earlier shock. Both fiscal policy and monetary policy settings are tighter now than they were in 2022, reducing the likelihood of an unchecked surge in prices.
However, the authors highlight a key difference in the shock's reach. "A global shock has larger indirect effects on inflation, as cost pressures build more broadly along global value chains," they wrote. "This, in turn, causes import prices to rise more sharply and the energy price shock to transmit stronger to the domestic economy."
Because the current shock is more global in nature than the 2022 episode, the economists say there is a risk of strong non-linear amplification if the shock turns out to be larger, broader or more persistent than anticipated.
They also noted behavioral and fiscal factors that could change the inflation outlook. Households may adapt more quickly to higher price levels given recent experience with inflation, and governments now have less fiscal capacity to shield consumers and firms from rising costs.
In sum, the ECB economics team portrays a mixed picture: some structural and policy conditions that temper inflationary pressures, set against global transmission channels and other initial conditions that could boost inflation if the shock intensifies.