The word "transitory" seems to be gone from the lexicon but European Central Bank (ECB) chief economist Philip Lane is sticking to his guns, insisting the current burst of inflation is merely a temporary Covid phenomenon that will peel away later this year.
He was speaking in the wake of Eurostat figures showing that euro zone inflation rose to 5 per cent in December, a record high for the currency bloc and well ahead of analysts' expectation for 4.7 per cent.
Energy prices, up 26 per cent compared to a year earlier, remained the main driver, but the increases for food, services and imported goods were also all well above the ECB’s overall 2 per cent inflation target, data from Eurostat showed on Friday.
The figures, as measured by the harmonised index of consumer prices (HICP), put Irish inflation at 5.7 per cent in December, higher than the 5.3 per cent recorded by the Central Statistics Office (CSO) in November, and at a time when many predicted inflation here would be moderating.
The CSO’s number, based on its own consumer price index (CPI) which includes mortgages and insurance, will be out later this month.
Speaking on RTÉ News, Lane said the current high rates should not be interpreted in relation to historical norms but were part of what he termed a “pandemic cycle of inflation”.
Lane did sound less certain on energy prices which he said were a “major economic issue” for the euro zone, particularly the geopolitical issues surrounding gas imports.
Surging inflation rates across the globe linked to energy prices and Covid-related supply chain issues, apart from triggering a major cost-of-living squeeze, have polarised opinion. Central banks have largely dispensed using the word transitory but insist it will moderate as we move away from Covid. Others, however, are predicting a more prolonged bout.
A key variable in the debate is wages. If wages start rising as workers demand better compensation for the current cost-of-living squeeze, that could create a wage-price spiral, something we haven’t had for decades and something that would change the current low interest rate environment.
