The burden will ultimately fall on the backs of the firms and workers, the head of the European Central Bank warns.
The euro area won’t be able to recover massive terms-of-trade losses incurred by rising energy prices, European Central Bank (ECB) President Christine Lagarde said during a conference at Frankfurt’s Goethe University on Wednesday.
According to the head of the bloc’s regulator, the cost of those losses must ultimately be shared between firms and workers.
“And it is important that there is fair burden-sharing between them, with both accepting that they cannot fully recover the income that the euro area has paid to the rest of the world and the ensuing loss of output,” Lagarde explained.
She added that the Eurozone has been hit by an inflation shock that is currently working its way through the entire economy.
“While headline inflation is likely to decline steeply this year, driven by falling energy prices and easing supply bottlenecks,” Lagarde concluded, “underlying inflation dynamics remain strong.”
The official outlined that an unprecedented series of negative supply shocks that battered the single currency area had been triggered by factors such as pandemic-induced disruptions and the energy crisis evoked by the EU’s attempts to build up sanctions pressure on Russia over Ukraine.
On the other hand, she said, the EU member states faced a positive demand shock after the reopening of economies in the wake of the Covid-19 pandemic.
“That favorable demand environment allowed firms to pass rising input costs through to prices much faster and more strongly than in the past,” Lagarde pointed out.
She noted that future interest-rate hike decisions would depend on incoming data, above all whether the regulator could see signs that painfully high inflation is headed convincingly down.
“With high uncertainty, it is even more important that the rate path is data-dependent,” the ECB chief said. That means “we are neither committed to raise further nor are we finished with hiking rates.”
Lagarde pledged to deliver price stability, bringing inflation back to 2% over the medium term at all costs.