According to European Central Bank President Christine Lagarde, inflation in the euro region is unlikely to reach the levels witnessed in the United States.
The ECB’s monetary policy has been questioned due to the euro zone’s high inflation, with the central bank lagging behind its British and American rivals in terms of normalization.
Inflation in the Eurozone reached a new high of 5% in December, owing partly to Europe’s skyrocketing energy prices.
Lagarde defended the ECB’s policies in a videoconference at the World Economic Forum’s Davos Agenda event on Friday, claiming that Europe does not share the United States’ “condition of excessive demand.”
She claims that demand in the United States is currently 30% higher than pre-pandemic levels, while demand in the eurozone is “just about at pre-pandemic levels.”
“When I look at the labor market we are not experiencing anything like The Great Resignation, and our employment participation numbers are getting very close to the pre-pandemic level,” she told the CNBC-moderated event.
“So I think those two factors, if you look at them carefully, are clearly indicating that we’re not moving at the same speed, and we’re unlikely to experience the same kind of inflation increases that the U.S. market has faced.”
In recent months, millions of Americans have left their jobs in search of better pay and working conditions. The movement has been nicknamed “the Great Resignation” by many people.
Core inflation in the US is 5.5 percent, compared to 2.6 percent in the eurozone, according to Lagarde.
“We have a forward guidance which is pretty solid,” Lagarde said. “And we will act — there’s no question in my mind that once the criteria are satisfied we will. But at the moment they’re not satisfied.”
Europeans had been “victims of our own success,” Lagarde argued and noted that advanced economies had witnessed a “staggering” recovery in demand that was more than supply capacity. She said that impediments such as a shortage of truck drivers and clogging at ports had added on to the demand-supply gap.
Lagarde however said that negotiations for wages were not “way up yet” and hence a sustainable movement in prices was not being witnessed by the ECB – one that could result in inflation “spiraling out of control.”
“On the contrary, we assume for the moment that energy prices will stabilize in the course of 2022 and that bottlenecks will also stabilize, and gradually those inflation numbers will decline,” she told the panel.
But the inflation outlook of the ECB was liable to change, Lagarde noted.
“Once we have completed our net asset purchases, we will look at other tools in the toolbox — including interest rate hikes,” she said.
The ECB announced last month that it would reduce its monthly asset purchases, but that it would maintain its exceptional monetary policy assistance until 2022.
(Adapted from CNBC.com)