In a recent speech, Christine Lagarde highlighted the dire implications of prolonged high inflation, linking it to the very fabric of democracy. This sentiment, echoed in my book “Turning Point 1971,” underlines the non-economic ramifications of inflation, often overshadowed by its economic impacts.
Lagarde, who also projected a return to two percent inflation by 2025, paints a seemingly reassuring picture. However, a closer analysis reveals a grim reality. Translated from central banking jargon, it suggests the European Central Bank (ECB) will continue struggling with price stability for at least another year, casting a shadow over their recent optimism.
Eurozone residents’ expectations further dampen this outlook. Anticipating 4.0 percent inflation over the next 12 months and a 2.5 percent monetary depreciation until 2027, they express clear skepticism towards the ECB’s ability to rein in prices. In essence, they lack confidence in their financial guardians.
This skepticism is compounded by expectations of rising inflation amidst slowing economic growth, hinting at a potential stagflation. This contradiction to the norm, where lower growth typically coincides with lower inflation, reflects a deep-rooted distrust in the ECB.
Incongruent
Yet, amidst these concerns, Lagarde’s recent statement in the European Parliament was lacklustre. She hinted at the possibility of discussing an early end to government bond buybacks, a key inflationary driver, by 2024 – a move seen as too little, too late. The ECB’s current annual expenditure of €170-180 billion on these buybacks, originally aimed at mitigating pandemic impacts, now appears incongruent with their anti-inflationary stance.
The ECB’s priorities also raise eyebrows, as evidenced by their latest podcast focusing on environmental risks rather than the pressing issue of price stability.
Finally, the ECB’s revelation of the new euro banknotes’ themes – European culture, rivers, and birds – set to be introduced in 2026 or 2027, is overshadowed by concerns over their diminishing value. The future worth of these notes, in the context of persistent inflation, remains uncertain, if not bleak. If it weren’t so sad, one could speak of an absurd comedy playing out in Frankfurt.
Edin Mujagić is chief economist of OHV Asset Management and author of the book Turning Point 1971. He writes an ECB Watch on European Central Bank monetary policy every month for Investment Officer. Click here to find the original version of this column in Dutch.