FRANKFURT, Germany (AP) – The President of the European Central Bank (ECB), Christine Lagarde, indicated that businesses may be quicker to raise prices in response to the recent oil shock stemming from the Iran war. She highlighted that the bitter memories of the inflation spike following Russia's invasion of Ukraine in 2022 may influence faster responses from firms and workers this time around.
During a conference in Frankfurt, Lagarde expressed concern about how the ongoing rise in oil and gas prices could lead to a swifter response from economic actors compared to the last episode of price surges. “We have a more recent memory of high inflation, which could affect how quickly costs are passed on and compensation is sought,” she noted.
Lagarde elaborated on the ECB's actions to combat the inflation spike in 2022 through higher interest rates but acknowledged that this experience has left a lasting impact. She pointed out that an entire generation has lived through its first encounter with significant inflation, which may result in quicker reactions to inflationary pressures this time. Notably, inflation in the eurozone peaked at 10.6% in October 2022, driven by the disruption of Russian natural gas supplies and rising oil prices, before falling to 1.9% in February this year, according to Eurostat.
Despite the current volatility in energy prices, Lagarde emphasized that monetary policy alone cannot curb oil prices. Traditionally, central banks tend to overlook temporary spikes in energy costs unless these costs propagate into broader prices for goods and services alongside wage demands, leading to a potential price spiral. She stated, “If the energy shock is seen to be limited in size and short-lived, the classical prescription of looking through should apply,” highlighting that by the time any interest rate hikes take effect, the impact of the inflationary spike may have already dissipated.
Central banks, including the ECB, typically increase interest rates as a means to control inflation, which in turn raises borrowing costs for consumers—for instance, housing mortgages and the costs associated with new production facilities. Lagarde mentioned there are reasons to believe that the current rise in oil prices might not be as inflationary as feared, noting that the magnitude of the energy price spike experienced currently is smaller than that experienced in 2021-2022.
However, Lagarde cautioned that if inflation trends persistently exceed the ECB’s target of 2%, it would necessitate a “forceful or persistent” response. She stated that it remains “too early to say” how policy should be adjusted in response to evolving economic conditions. The ECB’s last policy meeting on March 19 resulted in the decision to maintain its key interest rate at 2%, signaling a cautious approach to the current economic climate.
