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40-year high inflation ‘normally good time to tighten monetary policy’

But ECB has little control over what is driving the current price increases. says ING’s Brzeski


Pete Carvill

Rising inflation in the Eurozone has strengthened fears that the current bout of rising prices will not be as transitory as previously thought.

Eurostat data released last week indicates that headline inflation for March, on an annual basis, hit 7.5% – up from 5.9% in February.

Carsten Brzeski, chief economist for banking giant ING Germany, gave a brief overview on his blog.

He wrote: “An inflation rate at a 40-year high would normally be a good time for a central bank to tighten the monetary policy reins. However, the reasons for the current price increases are beyond the ECB’s control – and in addition to the threat of energy shortages, supply chain disruptions, and a shortage of skilled workers, the economy cannot use a new construction site in the form of deteriorating financing conditions.”

More ominously, he tweeted dryly this week that supermarkets in Germany had begun rationing.

Meanwhile, the ECB has done little to quench fears about where all this is heading.

As CNBC reported: “European Central Bank president Christine Lagarde said earlier this week that ‘three main factors are likely to take inflation higher’ going forward. She said ‘energy prices are expected to stay higher for longer’, ‘pressure on food inflation is likely to increase’, and ‘global manufacturing bottlenecks are likely to persist in certain sectors’.

“This economic backdrop is leading consumers to be more pessimistic about their prospects going forward, too. ‘Households are becoming more pessimistic and could cut back on spending,’ Lagarde said in a speech in Cyprus on Wednesday.”

Much of the dialogue around inflation has been the economic uncertainty wrought from Russia’s invasion of Ukraine. Yahoo Finance reported Jamie Dimon, chief executive of JP Morgan, saying this week that the conflict would have an ‘unprecedented’ economic impact.

Those remarks came in Dimon’s latest letter to shareholders of JP Morgan.

Ominously, Dimon wrote of the European economy post-Russia’s invasion of Ukraine: “We expect the fallout from the war and resulting sanctions to reduce Russia’s GDP by 12.5% by midyear (a decline worse than the 10% drop after the 1998 default). Our economists currently think that the euro area, highly dependent on Russia for oil and gas, will see GDP growth of roughly 2% in 2022, instead of the elevated 4.5% pace we had expected just six weeks ago.”