Lagarde: Problems in the supply chain limit growth, sustain inflation

Persistent pressures on the supply chain and rising energy costs are slowing the eurozone’s growth and will keep inflation afloat for even longer, said President Kristen Lagarde.

The ECB has been talking about a sharp drop in inflation next year, but policymakers now openly admit that their forecasts, which have already been revised several times, are still very low, as concerns about the global economy are having a negative effect.

But Lagarde continued to oppose voices and market assessments for a tighter policy, reiterating the ECB’s message that conditions for higher interest rates are unlikely to be met next year, as inflation is still far from the ECB’s target for just under 2%.

“Shortages of materials, equipment and manpower are affecting manufacturing output, weakening short-term estimates,” he told the European Parliament’s Economic Affairs Committee.

Inflation stood at 4.1% last month and could reach levels close to 4.5% by the end of the year, before a slow fall that would bring it below the ECB target just towards the end of 2022, economists predict.

Lagarde added that the problems are expected to subside next year and energy contracts also point to a significant drop next year, suggesting that inflation will fall, even if price normalization takes longer.

“We continue to see inflation normalize next year, but it will take longer than we initially expected,” he said.

Lagarde predicts that average annual inflation will be below 2% next year, a rate that is likely to be outdated as all private-sector forecasts, including those of the Commission, point to price increases of more than 2%.

He added that next year’s wage increase will be slightly higher than this year, but the risk of side effects remains limited.