Eurozone central bank chiefs warn on soaring inflation expectations

The heads of the French and German central banks have said companies and households increasingly believe prices will continue to soar, raising the chances that inflation in the eurozone’s two largest economies will remain uncomfortably high in the coming years.

Businesses and consumers in Germany and France expect inflation to be higher for longer than they did six months ago, according to new research from the Bundesbank and Banque de France, which chiefs Joachim Nagel and François Villeroy de Galhau on Thursday described as “worrying” and “bad news”.

Inflation in the eurozone is now 8.1 per cent, the highest since the introduction of the single currency and more than four times the European Central Bank’s 2 per cent target.

The jump in inflation expectations in the eurozone’s two biggest economies is a challenge for rate-setters at the ECB as it complicates their push to bring price growth back down to that 2 per cent target. When companies expect inflation to stay higher for longer they are more likely to raise prices while workers are more likely to demand higher wages to offset their loss of purchasing power. This risks creating a 1970s-style wage-price spiral that keeps inflation high.

German households, hit hard by food and energy price increases following Russia’s invasion of Ukraine, now expect inflation in the country to average 5.3 per cent over the next five years, according to a Bundesbank survey. Nagel, who became Bundesbank president in January, said at a joint conference with the Banque de France that the survey highlighted the risk of the ECB responding to soaring prices “too little, too late”.

The Banque de France also published data for the first time from a poll of business leaders, which showed that they expect French inflation of 5 per cent a year from now — up from a forecast of 3 per cent at the end of last year.

Its governor Villeroy de Galhau said the data had “good news” as well as “bad news”, citing the fact that business leaders expected inflation to average “only” 3 per cent in the next three to five years as evidence of the latter.

Companies in Germany expect inflation to average 4.7 per cent over the next five years, up from 3.4 per cent at the start of the year. Nagel said the data was “worrying” as it suggested expectations of future inflation were becoming “less anchored”.

The ECB listed inflation expectations rising above its target and wages rising faster than expected as two of the upside risks for price growth after its meeting two weeks ago, when it announced plans to raise interest rates next month for the first time since 2011. Villeroy said he hoped the ECB’s plan would lower inflation expectations. He also distanced himself from the ECB’s aim of raising rates “gradually”, saying he preferred the word “orderly”.

Inflation expectations in the two biggest eurozone economies are now approaching those in the US, where households expect price growth of 4.8 per cent in three years’ time, up from 3 per cent two years ago, according to a New York Fed survey.

The Federal Reserve, unlike the ECB, has already raised rates aggressively, increasing the federal funds target by 75 basis points to a target range of 1.50 to 1.75 per cent earlier this month. The ECB’s benchmark deposit rate remains at minus 0.5 per cent, though it is likely to rise above zero in September.

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