Global Market | High energy costs threaten eurozone inflation outlook: ECB's Nagel

Eurozone inflation remains elevated and the risks are tilted to the upside, but higher energy costs have yet to translate into broader wage and price pressures, Bundesbank President Joachim Nagel said on Monday, Reuters reported.

Inflation in the 21-member euro zone is currently running at 3.8%, almost twice the European Central Bank’s 2% target. The sharp rise has raised concerns that surging energy prices could eventually trigger second-round effects across wages and other prices, making inflation more persistent and potentially requiring tighter monetary policy.

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According to Reuters, Nagel said there were so far no clear indications that higher inflation had become embedded in wage and price-setting decisions. He added that longer-term market-based and expert inflation expectations remained broadly aligned with the ECB’s 2% target.

Nagel nevertheless cautioned that inflationary pressures were likely to remain strong even after excluding volatile food and energy components.

Energy markets remain a particular source of concern. Reuters reported that Nagel warned that gas prices could be especially vulnerable because European storage levels are low, potentially forcing the region to purchase significantly larger volumes during the winter, Reuters reported.

He also pointed to disruptions in refining capacity as a factor pushing up prices for refined petroleum products. Weather-related risks, including droughts and wildfires, as well as fertiliser shortages, could further increase food prices, Nagel said.

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The range of inflation risks has strengthened expectations in financial markets that the ECB could raise its 2.5% deposit rate by another two or three times over the coming year, following two increases during the summer.

Nagel did not endorse those market expectations, however, stressing that the ECB should remain flexible and base its monetary-policy decisions on incoming economic data.

LSEG data showed markets were pricing in a 20% probability of an ECB rate increase in October and an 80% probability of a hike in December, Reuters reported.

Nagel also addressed rising bond yields, saying higher yields were improving the relative attractiveness of bonds for reserve-asset managers.

At the same time, he said gold remained an important diversification option amid persistent geopolitical tensions and credit risks linked to elevated government debt levels.

(Disclaimer: This article is based on inputs from agencies. These do not represent the views of The Economic Times)