Inflation data likely to intensify headaches for central bankers

ECB stance that interest rate rises in 2022 are ‘very unlikely’ is coming under pressure

The scourge of rising prices was visibly in evidence on the streets of Dublin this week, with city centre traffic ensnarled by a hauliers’ protest against higher fuel costs. But when does inflation start to become the kind of problem central bankers, not just truckers, act upon?

At an Oireachtas budgetary oversight committee hearing on the same day, Central Bank governor Gabriel Makhlouf said he was "very, very conscious that inflation today is impacting on households across the country". He was "worried", he said.

Irish consumer price inflation reached 5.1 per cent in October, its highest rate since April 2007. Across the euro zone it stands at 4.1 per cent year-on-year, well above the 2 per cent target. A flash November estimate for the euro zone due on Tuesday is expected to show further acceleration.

Anxious not to make premature interventions that swiftly turn into counter-productive economic drags, European Central Bank (ECB) policymakers have not exactly rushed to respond. To date they have stuck to the view that soaring energy prices will plateau in 2022 then decline gradually, while other inflationary pressures caused by post-lockdown supply-chain bottlenecks – or "blockages", to use Makhlouf's term – will surely unwind.


At Wednesday's committee hearing Central Bank director of economics and statistics Mark Cassidy also made clear that there was no evidence of a wage-price spiral in the Irish economy. Where wages were increasing it was in sectors such as business and financial services, construction and IT services that "are able to afford it".

But Makhlouf also pushed the message that when the facts change, minds should too. While “increasing interest rates today would be a mistake”, he wanted to stress that this was based on evidence “we have today”.

This is an issue not just for the ECB but for the Federal Reserve, the Bank of England and other central banks too. For now the Fed and the Bank of England both seem more inclined to turn to rate increases than the ECB, with president Christine Lagarde declaring only earlier this month that it was "very unlikely" to raise rates in 2022.

Minutes of the October meeting of its governing council, of which Makhlouf is a member, noted “elevated” uncertainty about the inflation outlook for 2023 and 2024, however. And at its September meeting some policymakers also argued in favour of a bigger cut in asset purchases than was ultimately signalled.

An upwards revision to the ECB’s short-term inflation forecasts is now expected in December. Might it get its policy stance out of first gear then too?