The chief economist of the European Central Bank has said inflation is likely to moderate this year as the current high rate is part of an “epidemic cycle of inflation”.
Data from Eurostat shows inflation in the eurozone rose to 5% in December, a new high for 19 countries that use a single currency.
In Ireland, the rate jumped to 5.7% last month, especially for consumers with energy costs in their pockets.
This three-year period – 2020, 2021, 2022 – is basically part of a pandemic cycle, of inflation, if you like. So in that sense, I think, it should not be interpreted in comparison to historical norms
The ECB’s Philip Lane said the rise in energy prices is “a major concern”, adding that he expects inflation to moderate this year, and continue to decrease in 2023 and 2024.
“Inflation is going to come down this year. It is going to be up to where we want it to be in the long term,” he told RTE.
“But this three-year period – 2020, 2021, 2022 – is basically part of a pandemic cycle, of inflation, if you like.
“So in that sense, I think, it should not be interpreted in comparison with historical norms. The pandemic is a unique link.
“At our December meeting a few weeks ago, we looked at the forecast for 2023, 2024 for this year.
“Our analysis is that this year in 2022, inflation will come down.
“And, in fact, we anticipate inflation to be slightly below our target in 23/24.
“So, yes, we hear numbers like 5% in December 2021. It sounds very strange after a long period of low inflation.
“But again, to reiterate, we think inflationary pressures will ease over the course of this year and in fact, we think inflation will be a little bit below where we want to put it in terms 23, 24. One of our goals.”
Rising cost of energy has been at the root of rising inflation.
An analysis by the price comparison website Bonkers.ie showed that the price increase could increase the annual household energy bill by up to 1,300 euros.
Mr Lane, a former governor of the Central Bank of Ireland, said he expected the pressure on the energy sector to ease this year.
But Europe’s status as a major importer of energy and external geopolitical factors adds uncertainty to the mix.
“The fact that energy prices have gone up so much is a big concern,” he said.
“The European economy is a major importer of energy. Europe collectively, by paying so much for energy inputs, is a major economic issue.
“Now, the fact that prices have risen so much means that compared to last year’s growth rate, there is probably less upside this year.
“But there are factors on which we definitely need to focus on geopolitical issues.
“On the other hand, what we think is that the supply pressure should ease overall this year.
The fact that energy prices have risen so much is a major economic policy issue in general.
“In the oil markets, we think that the supply pressure will ease, but as you indicated, the gas market for energy in Europe is quite important, and there are all kinds of different dynamics going on there.
“But I will certainly remind you that supply reactions are also happening there, for example, shipping liquefied natural gas around the world, it is being redirected to Europe.
“So we’ll keep an eye on it. It’s a very important issue, but it’s much broader than the ECB issue. The fact that energy prices have gone up so much is a major economic policy issue in general.”
Mr Lane also said he did not anticipate the ECB would change lending rates, which have fallen to historic lows in recent years.
“While we think high inflation is not going to be sustainable, it is not the case for a change in our interest rate policy,” he said.
“But of course, I must reiterate, we will have new data coming in over the year and you can expect the ECB to pay a lot of attention to all that data.”