Comments from the ECB President

  • Monetary policy should normally look through temporary supply-driven inflation
  • We are monitoring developments carefully, for now we see no signs that this increase in inflation is becoming broad based
  • After pandemic our forward guidance and APP will ensure supportive monetary policy
  • We see no signs that this increase
  • Beyond the pandemic we expect inflation to only slowly converge towards 2%
  • Wage developments so far show no signs of significant second-round effects
  • We will only react to improvements in headline inflation that we are confident are durable

'For now' is the key phrase here. There's a slow climb down from Team Transitory ongoing.

There's a change of tone here from just three weeks ago when Lagarde said:

We expect inflation to increase further over the coming months and to decline again next year. The current increase is largely being driven by higher energy prices and by base effects from the sharp fall in oil prices at the start of the pandemic and the impact of the temporary VAT reduction in Germany last year. By early 2022, the impact of these factors should fade out as they fall out of the year-on-year inflation calculation.

At the time, I scoffed at Lagarde who seemingly didn't know what was going on with natural gas and power prices in Europe. Those won't be falling out of year-over-year data in early 2022.

Lagarde tweet FXL

It's not just Lagarde either. There's a crisis of faith among global central bankers brewing. Yesterday, the BOE's Bailey started to question what was happening in inflation and even the reliably-dovish NY Fed President Williams said he's not seeing worrying signs of inflation yet but it's something to watch closely.