Lagarde Sees Limited U.S. Inflation Spillovers to Euro Area

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European Central Bank President Christine Lagarde said accelerating U.S. inflation that prompted the Federal Reserve to shift its view of price risks will have only a limited impact in the euro area.

Spillovers can occur “through the direct channel of imported goods originating in the U.S. and through several indirect trade or expectations mechanisms,” she told lawmakers in the European Parliament on Monday. Still, the overall effects on euro-area inflation “are expected to be moderate.”

Lagarde Sees Limited U.S. Inflation Spillovers to Euro Area

That view highlights a difference in threat assessments between the ECB and the Fed, which last week acknowledged the risk that inflation could be faster than forecast as it pulled forward expectations for the timing and pace of interest-rate increases.

Days earlier, euro-area policy makers kept up an accelerated pace of bond purchases to ensure a fledgling recovery doesn’t get derailed, and shifted their view only so far as to acknowledge “balanced” economic risks for the first time since 2018.

“The outlook for the economy is indeed brightening as the pandemic situation improves,” Lagarde said. “Underlying price pressures are expected to increase somewhat this year owing to temporary supply constraints and the recovery in domestic demand, but are likely to remain subdued.”

Fed Chairman Jerome Powell, by contrast, told reporters: “Is there a risk that inflation will be higher than we think? Yes.”

Compare, Contrast

One difference between each jurisdiction, according to Lagarde, is that the U.S. recovery from the pandemic is much more advanced than that of the euro zone.

“I don’t think that we can actually compare the U.S. situation and the euro situation,” she said. “They’re in a different situation in terms of the cycle, they’re in a different situation in terms of inflation, and they’re in a different situation in terms of inflation expectations.”

Lagarde said that officials will be “extremely attentive” to wage negotiations to monitor any price risks, though she said that they aren’t seeing “serious reasons to believe that wages are negotiated at a level that would lead to stronger underlying inflation factors.”

The ECB president also revealed details of the Governing Council’s first meeting in person since the onset of the crisis, where they gathered for a retreat near Frankfurt to discuss their strategy review, including whether to adjust their inflation goal. She said that further meetings will seek to draw together all strands in a final phase of deliberation.

“We made good progress during the retreat,” she said. “Since all the issues covered in the seminars are highly interdependent, the remaining discussions will focus on deriving their joint implications for the monetary policy strategy.”

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