ECB signals data-driven policy as inflation risks stay elevated

Traders Union
All News
Central Banks
ECB and inflation risks

Highlights

October headline inflation at 4% exceeded ECB's earlier forecasts but matched market expectations, driven mainly by energy inflation rising to 20.8%.
Core inflation remains steady at 2.5%, while services inflation rose to 3.3%, with the ECB awaiting detailed data to assess sector-specific pressures.
Christine Lagarde emphasizes the ECB's data-dependent stance due to persistent inflation risks, highlighting energy futures and higher long-term rates as key December policy drivers.

Inflation outlook and policy direction

As reported by the ECB, Lagarde says headline inflation in October stands at 4%, higher than the central bank had expected a few months earlier but in line with market expectations. She says the increase is largely driven by energy, with energy inflation rising to 20.8% from 18.9% in September because of the conflict in the Middle East and reduced global refinery capacity, while food inflation also moves higher.

Lagarde says underlying indicators remain stable, with core inflation, excluding energy, food, alcohol and tobacco, unchanged at 2.5% and services inflation edging up to 3.3%. She says the ECB still needs the detailed breakdown to assess whether services price pressures are concentrated in energy-intensive sectors such as transport or reflect broader indirect effects.

She says the ECB is not currently seeing second-round effects beyond those already built into its projections, citing multi-year wage agreements and companies' wage expectations. While declining to pre-empt the next forecast, Lagarde says higher energy futures and higher long-term interest rates since the September projections are factors that will influence both inflation and growth, and adds that it would take significant changes for the policy direction she expects in December to shift.

Reflecting on the inflation surge that followed the 2021-22 energy shock, Lagarde says central banks, including the ECB, wrongly assessed the initial supply shock as transitory. She says the reopening-driven demand shock complicated the picture and forced policymakers to revisit that assumption, reinforcing the ECB's current meeting-by-meeting, data-dependent approach amid what she describes as heightened uncertainty and global fragmentation.

Draghi’s warning on the policy trade-off between inflation control and long-term growth highlighted how keeping interest rates above growth for too long can worsen debt dynamics and raise pressure for “fiscal dominance.” Our earlier article noted that central banks should prioritize bringing inflation back to target while avoiding unnecessary damage to investment and productivity, and it stressed that clear communication can narrow the range of expected rate paths when markets face new supply shocks.

This material may contain third-party opinions, none of the data and information on this webpage constitutes investment advice according to our Disclaimer. While we adhere to strict Editorial Integrity, this post may contain references to products from our partners.