ECB's Lagarde addresses commodities prices
New York (July 2) This morning Christine Lagarde, President of the ECB was interviewed by La Provence, and although the interview was about the central bank's role in the health crisis some economic nuggets were released.
The ECB President about the rise in commodities prices. She said " The recovery in itself is good news: it started in China, is markedly stronger in the United States but Europe isn’t being outdone. The double monetary lever applied by the ECB and the fiscal policies pursued by the governments and the European Union is fuelling the recovery.".
She mentioned some specific commodities and said "We observe a price increase which is notably driven by two base effects. The first relates to petrol prices, which collapsed to less than USD 25 per barrel during the pandemic before climbing back up to around USD 75 per barrel currently. The second base effect concerns Germany, where the rate of VAT, which had been lowered last year to support the recovery, was restored on 1 January 2021. However, these base effects will not last. We will see a return to lower rates of inflation as indicated in our projections.".
As inflation is such a big topic at the moment she was asked about the ECB's inflation projections in Europe. Lagarde said " Our inflation projections for this year are around the 2% mark – which is something we haven’t seen in more than eight years. The increase in prices should nevertheless slow to 1.5% in 2022 and 1.4% in 2023. We, therefore, expect inflation in the medium term to stabilize below our objective".
So the same old "transitory inflation" stance is sticking. The Fed has agreed that there could be a significant overshoot and the taper talk has begun. One major difference between the two central banks is the rise in the Euro. As commodities are priced in U.S. dollars the stronger EUR/USD exchange rate has held back the rate of inflation for a while. But recently there has been a bounce-back in the greenback.
The latest manufacturing PMI reports show an increase in costs for materials and transport. The issues in India with the pandemic have made a massive impact. Lots of raw goods and commodities are shipped from the nation and they have been offline for a while now along with some other major shipping nations. Once the vaccination rates improve some analysts are expecting the price pressures to abate but this will take time and monitoring of the situation has to be tight.
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