Energy pressures could survive Covid supply shocks

LONDON – Energy price volatility could outlive the current supply problems linked to Covid in the global economy, said European Central Bank President Christine Lagarde.

The euro area has been affected, like many other regions, by supply chain disruptions caused by the coronavirus pandemic and the resulting social restrictions. For example, the German auto industry had to contend with bottlenecks caused by a shortage of semiconductors.

However, a surge in energy prices – and its impact on inflation numbers – could be a much longer-term problem for the region, Lagarde told CNBC’s Annette Weisbach in an exclusive interview Thursday.

“Things will fall into place as new sources of supply are identified,” she said, describing the current economic environment as “a period of adjustment”.

“Energy is going to be an issue that will probably stay with us longer. Because we are also in the process of shifting from fossil-fueled energy sources… We aspire to be a lot less [reliant on] fossil sources, ”Lagarde said.

The euro zone – and the European continent at large – is grappling with a shortage of natural gas which is pushing up consumers’ energy bills. Some governments, notably Spain, Greece and France have started to intervene to compensate part of the economic damage to citizens.

However, there are many uncertainties about how long these price pressures in the energy market will last and what they will mean for inflation in the 19-member region over time.

Some industry experts have suggested that recent price spikes, especially for natural gas, have been accentuated by new EU climate policies and are a mere reality of the wider push towards renewables.

EU climate chief Frans Timmermans insisted the price increases are not the bloc’s fault. “Only about a fifth of the price increase can be attributed to rising CO2 prices,” he told the European Parliament earlier this month. “The others are simply shortages in the market.”

Asked about climate goals and the transition to renewables, and whether that would be inflationary or deflationary, Lagarde replied: “We’re starting to see studies and academics looking at it and I think the jury is still out.

“My hunch, after reading some of them, is that this is probably going to push prices up for a short time and probably later it could have a deflationary impact,” she added.

The only mandate of the ECB is to work towards price stability, defined as an inflation target of 2%. Large fluctuations in consumer prices increase the likelihood of central bank monetary action.

This has been an important theme for ECB watchers, as consumer prices have risen steadily in recent months. In fact, inflation peaked in 10 years in August and more peaks are likely in the months to come.

“What is true is that we have revised upwards many of our projections over the last three quarters. Things have accelerated and this is true for growth, it is true for inflation, and that’s true for jobs. So in a way, that’s a bundle of good news because it means our economies are responding, “said Lagarde.

“But of course it creates friction,” she said, “these bottlenecks, these supply chains that have been disrupted by the pandemic and where getting the machine back on track is taking a long time to come. time.”

“But in all of this, we hope it will last in terms of growth, for activity to continue; we hope it will last in terms of employment so that employment continues and unemployment goes down; and for prices, we think there will be a return to much more stability in the coming year, as many of the causes of the price increase are temporary, ”Lagarde told CNBC.

Earlier this month, the ECB estimated an inflation rate of 2.2% at the end of the year. This number is then expected to decline to 1.7% and 1.5%, respectively in 2022 and 2023. Revised forecasts are expected in December.

“When you look, you know, what causes [higher inflation], this is largely linked to energy prices. You look back a year ago and the prices were at their lowest. They have of course increased and the difference largely explains the inflation that people are unfortunately experiencing at the moment, so does the impact of VAT, “Lagarde said on Thursday, reiterating the central bank’s position. .

Nonetheless, there is a lot of anticipation in the market as to what the ECB will do now in monetary policy – as well as the Fed. In the United States, Federal Reserve officials reiterated on Wednesday that a reduction in bond purchases would “soon.”

The US central bank faces pressures similar to those of the ECB, with inflation rates also on the rise and an overall improvement in economic sentiment since the onset of the coronavirus pandemic.

However, Lagarde was unable to compare the ECB’s timetable with the Fed’s plan to reduce its stimulus measures soon.

“I have no idea. I have no idea because we operate with different programs,” she said.