A recent surge in producer prices caused by supply chain disruption has “nearly zero connection” to underlying economic trends and does not suggest that rising inflation is a threat, according to the European Central Bank’s chief economist.
“There are shortages, for example in semiconductors, and there are constraints in some shipping routes and of course when you have an unplanned bottleneck there is going to be some price action, but that is not inflation,” Philip Lane said in a webinar on Thursday.
His comments are the most forceful indication so far that the ECB is determined to maintain its ultra-loose monetary policy despite the growing likelihood that eurozone inflation will top its target later this year as coronavirus containment measures are lifted and the bloc’s economy rebounds from last year’s historic recession.
The ECB’s governing council is expected to discuss the prospect of slowing the pace of its bond purchases to reflect the improving economic outlook when it meets next month. However, Lane said it still had “a lot of work to do” to achieve its inflation target of just below 2 per cent over the next few years.
Former ECB president Mario Draghi echoed Lane’s remarks later on Thursday, arguing that the rising pace of inflation was probably temporary and he did not believe interest rates would have to increase.
“Monetary policy will continue to remain expansionary,” he said at a press conference, adding that inflation was being driven by a scarcity of raw materials and “certain fundamental components of the production process” but the impact was accentuated by very low levels of price growth last year.
Eurozone inflation rose to 1.6 per cent in April after several months below zero late last year, and many economists expect it to rise above 2 per cent this year. But the ECB forecast in March that it would fall back to 1.4 per cent in 2023.
“Look at the level, not the most recent change, because when you are climbing out of a hole, you are still in a hole,” said Lane.
Data published on Thursday showed that German producer prices rose 5.2 per cent in April from a year ago, the highest rate for almost a decade, driven by double-digit increases in the prices of metals, wood and energy, which offset lower food prices.
EU manufacturing input prices rose at the fastest pace in a decade in April, according to the monthly IHS Markit survey of purchasing managers, pushing up output prices at the quickest pace since records began in 2002. Builders, car producers and manufacturers of basic materials reported the biggest jump in input prices since the data series began in 1992. Record price growth was also recorded by machinery and equipment producers.
Services businesses in the EU also reported rising input prices, but at a much slower pace and with no effect on output prices, according to the survey. Businesses in hard-hit sectors such as consumer services reported falling output prices, particularly in tourism and recreation.
Lane said the recent rebound in inflation was mainly caused by “a reversal of what we saw last year” as the sharp fall in oil prices when the pandemic hit in the spring of 2020 “has now been unwound”.
But he played down the impact of the supply bottlenecks, which have left manufacturers grappling with shortages and price surges in many raw materials. “That is just supply and demand and we know when you have those price spikes, supply tends to respond,” he said. “The price of PPE masks is very different today to what it was a year ago.”
Lane added that there was “nearly zero connection between any spikes in prices on the reopening of the world economy and what goes into the inflation trend”.
Two-thirds of the inflation index in Europe and the US was based on prices of services, not manufacturing, he said. “When you think about what goes into services inflation, it is basically the labour market, and both in the US and Europe the labour market is nowhere near and there is no prospect of a super-rapid bounceback.”
The ECB should “take a medium-term perspective and not confuse the reopening of the economy with a new golden era”, Lane warned, pointing out that eurozone unemployment is not expected to hit pre-pandemic levels until 2023.