Falling energy prices will lower underlying inflation in the euro zone and rapid wage growth is not putting undue pressure on prices, European Central Bank chief economist Philip Lane said today.
Inflation has been stubbornly high for nearly two years and some policymakers have been warning that underlying inflation was at risk of getting stuck above the ECB's 2% target, possibly inducing a self-reinforcing process.
Pushing back on these worries, Professor Lane argued that underlying inflation surged as high energy costs had to be priced into the cost of everything from goods to services.
This process is bound to reverse now that gas prices are back at pre-war levels.
"I don't think it's symmetric - but when energy prices fall, core inflation does follow, because there is less pressure from an energy cost, there's less pressure on the cost of living, therefore on nominal wage increases," he told a conference.
"So, we do think this spectacular reversal of energy prices will feed into lower core, but the timeline for that and the scale of it is uncertain," he added.
Speaking earlier this week, Dutch central bank chief Klaas Knot warned that underlying inflation, the ECB's main concern now, is not yet showing signs of abating, particularly in the services sector.
"As monetary policymakers, we need to be assured that we also see a meaningful reversal in underlying inflation," Knot said.
Boris Vujcic, Croatia's central bank chief, also voiced some skepticism about disinflation, arguing that he had doubts that the ECB could get inflation back to 2% within the next two years.
Philip Lane also pushed back on worries that nominal wage growth is getting too high for comfort and could also reinforce inflation.
"On average, wages are rising in a very moderate way - many people are still locked into old contracts," he said.
"The latest deals are coming in at above 5%, but (this is in the) ballpark of what we expect," he stated.
Nominal wage growth is set to peak this year and it will still take real wages until 2025 to rise back to their 2019 level, he added.
He also said today that the European Central Bank should not try to predict where interest rate hikes need to end given the vast uncertainty in inflation dynamics.
"We've chosen at the Governing Council not to convey a week by week or meeting by meeting (estimate on the) terminal rate because it conveys a sense of certainty which doesn't exist," he said.
His comments come just days after a host of policymakers including Germany's Joachim Nagel, France's Francois Villeroy de Galhau and the Netherlands' Klaas Knot made specific predictions on the number of rate hikes still needed and timing of the peak rate.
