The chief economist of the European Central Bank, Philip Lane, has said it's too early to declare victory 'in any way’ over inflation and that he expects headline inflation to temporarily increase this month.
He was speaking at the Economic and Social Research Institute in Dublin, where he said next year will be a year of transition.
Professor Lane disputed market assessments that the ECB will start cutting rates as early as March.
He said this is based on the faster than anticipated fall in inflation so far this year and doesn't factor in the uncertainties which still lie ahead.
He said falling energy prices have been the main contributor to falling prices this year but the market remains volatile. Food inflation has also moderated but the ongoing effects of climate change mean it’s harder to predict where they will go in the future.
He also said that the gradual removal of cost-of-living supports across the euro area will see inflation go up temporarily, possibly even this month.
The chief economist said that inflation would have been even higher a year ago without those government interventions but as they come to an end, there will be some uplift in inflation.
He said there has been 'some unusual factors' which have led to a faster than expected decline in inflation so far this year but there are still some ‘pretty big open questions’ about next year and ‘the one big one’ is wages which he described as ‘climbing steeply across Europe.’
Prof Lane said it would be important to look at wage bargains in the opening months of next year. The other positive contributor to inflation will be the ECB’s forecast for the euro area economy to grow more quickly next year.
Speaking to RTÉ News, he said: "We do think next year inflation is not going to fall very quickly."
However, he went on to say: "We also have the underlying trend coming down. So, next year is a transition year." He said that by 2025 and 2026, the Bank expects to be ‘more or less’ back to its target inflation rate of 2% but "...next year is a year where there are more inflationary pressures than we would like."
Prof Lane said the ECB has "a very clear target of 2%" and will make adjustments as needed.
"Europe went for too long with inflation below 2%" he said, and that rate is the Bank's target and commitment.
