Reopening price spikes do not mark new era of inflation – Philip Lane

European Central Bank (ECB) chief economist Philip Lane said on Thursday that recent price spikes for goods and services as economies continue to reopen from Covid-19 restrictions do not mark a new era of high inflation.

“There is nearly zero connection between any kinds of spikes under the reopening of the economy and what goes into the inflation trend,” Mr Lane told an online event hosted by the Dublin-based Institute of International and European Affairs.

While the annual rate of euro zone inflation picked up to 1.6 per cent last month from 1.3 per cent in March and 0.3 per cent a year earlier, the former Central Bank of Ireland governor said the ECB is projecting that inflation will be 1.4 per cent in 2023, below its aim for price growth of close to 2 per cent.

The ECB has helped the recession-hit euro zone economy through its worst crisis to date and a robust recovery, coupled with a jump in inflation, may force policymakers to discuss whether to start dialling back the ECB’s €1.85 trillion Pandemic Emergency Purchase Programme when its governing council meets on June 10th.

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But while minutes from the Federal Reserve’s April meeting, released on Wednesday, show that a number of US central bank policymakers highlighted that it would be appropriate “at some point” to begin tapering economic stimulus, the consensus stance among economists is that the ECB is behind the Fed in that debate.

Dovish comments

Mr Lane’s dovish comments on Thursday, saying that the ECB has “a lot of work to do” to increase inflation to close to 2 per cent have underlined this view. “This narrative of a new inflation environment, I just put very little weight on it,” he said.

He added: “The idea that the world and the euro area have a kind of environment for persistent inflation, I just don’t see that.”

While Mr Lane said that there is going to be a “good rebound” this year, the euro zone economy is not expected to get back to 2019 levels until next year, while it is expected to take another 12 months for unemployment levels to return to where they were before the pandemic. In addition, many companies are dealing with “compromised” balance sheets.

“When you’re climbing out of a hole, you’re still in a hole,” he said, adding that a rebound does not deliver a sustained recovery.