Inflation fears ‘overstated’, Central Bank governor says

Gabriel Makhlouf warns post-pandemic supply bottlenecks may be prolonged

Post-pandemic inflation fears are overstated, the governor of the Central Bank, Gabriel Makhlouf, has said, suggesting the recent acceleration in price growth is "transitory".

However, he warned the current supply bottlenecks affecting many businesses and sectors “could be prolonged”.

“Fears of excessive euro area inflation are overstated and current price pressures reflect transitory factors that will fade out over time,” he told the annual policy conference of the Dublin Economics Workshop (DEW).

“Nevertheless, there are also indications that the current supply bottlenecks could be prolonged so we need to continue to be vigilant to risks,” he said.


His comments feed into a debate about whether inflation after the pandemic could become a serious problem.

For the past decade, central banks have been concerned that inflation was too low. Now as economies recover from the pandemic-driven downturn, inflation is climbing.

Consumer prices across the euro zone surged to a 10-year high of 3 per cent in August, challenging the European Central Bank's benign view on price growth, while inflation in Ireland also rose to a 10-year high of 2.8 per cent driven by a rise in the cost of transport, housing, restaurants and hotels.

Price pressures

“There is considerable uncertainty about the persistence of price pressures and we need to interpret this data and the outputs of our models with caution,” Mr Makhlouf said.

“The pandemic is bringing about structural changes in our economy, which may only become more evident over time,” he said.

Mr Makhlouf was speaking on a panel with three other commentators all of whom disagreed with his prognosis that the current surge in inflation was transitory.

Gillian Edgeworth, a strategist with financial firm Wellington Management, said climate change; a greater focus on inequality and social stability; ageing demographics; and a temporary or otherwise reversal in the globalisation trend were likely to reinforce price growth for some time.

Jim Reid, research strategist with Deutsche Bank, said “the bias in the world” had moved to looser monetary and fiscal policy, which would keep inflation elevated.

Marc Coleman, founder of Octavian Research, said the Irish inflation story was “much more than post-pandemic price unwind”. A massive build-up in public and private investment in infrastructure was likely to hit capacity constraints, creating further upward momentum in prices.

The Irish Fiscal Advisory Council this week warned that the Government’s plan to ramp up spending in the coming years could lead to an acceleration in prices if capacity constraints, most notably in the construction sector, are not eased.

Mr Makhlouf said the outlook for Ireland for the rest of the year was “very positive in the aggregate, although there remains considerable uncertainty about the trajectory of the pandemic and its knock-on effects are not uniform across the economy”.

He noted the rebound in the second quarter, which saw modified domestic demand, a measure of domestic activity, increasing by 8.4 per cent, has been followed by further positive news in higher-frequency business and consumer confidence indicators, labour market developments and indicators of consumer spending.

However, he warned “the economic experience of the pandemic and the road beyond is not uniform across all sectors” as indicated by the existence of both slacks and bottlenecks.

Fiscal policy

Mr Makhlouf also spoke about the European Central Bank strategy review, with a focus on the revised inflation target and what the current inflationary dynamics might mean for monetary policy going forward.

“The change in the ECB’s monetary policy strategy will ensure that we can better deliver on our primary mandate of maintaining price stability, but we must always remain conscious of the other policy areas that impact on our objective,” he said.

“Fiscal policy has a role to play in helping drive aggregate demand, sustaining the recovery, and supporting the path to the ECB’s inflation target and the normalisation of monetary policy,” he said.

“When we look at the pandemic, the overall macroeconomic response deployed by European and euro area institutions and governments has certainly been more coherent and impactful than in the years of global financial crisis – precisely because of better co-ordination between monetary and fiscal policy.”

Mr Makhlouf said that the Economic and Monetary Union framework had “underestimated the role of fiscal policy to counter the cycle”.

“The experience of the global financial crisis highlights how the framework did not provide sufficient incentive for governments to build fiscal buffers during good times that could have been used to counter the negative shock that the crisis imposed upon the euro area economy,” he said.

“It is now clear that combining monetary accommodation with fiscal expansion is especially powerful to stabilise the economy when policy rates cannot be lowered further.”

Eoin Burke-Kennedy

Eoin Burke-Kennedy

Eoin Burke-Kennedy is Economics Correspondent of The Irish Times

Colin Gleeson

Colin Gleeson

Colin Gleeson is an Irish Times reporter