In a speech, ECB President Christine Lagarde anticipates Eurozone inflation to continue falling as lagged price pressures recede and tighter monetary policy increasingly affects demand. However, she notes that historically high wage growth, driven by tight labor markets and compensation for high inflation, will support core inflation over the projection horizon, as it gradually returns to rates around the ECB’s target.
Lagarde admits that this outlook is shrouded in uncertainty, with both upside and downside risks. She states, “Stronger than expected pipeline pressures or higher than anticipated increases in wages or profits could drive up inflation, while financial market tensions and falling energy prices could lead to faster disinflation.”
ECB staff projections predict that Eurozone economy will recover in the coming quarters, driven by a strong labor market, resolved supply bottlenecks, and moderating inflation. Nevertheless, Lagarde acknowledges that risks to the growth outlook lean towards the downside, with persistently elevated financial market tensions potentially dampening confidence and tightening broader credit conditions more than anticipated. Russia’s ongoing war against Ukraine remains a significant downside risk to the economy, potentially raising energy and food costs once more.
