Inflation Risks Tilted to the Upside, ECB's Lagarde Says

Summary

• Inflation risks are tilted to the upside, especially in the near term, according to ECB President Christine Lagarde.
• A prolonged war in the Middle East is a key upside risk, potentially causing a larger and longer-lasting increase in energy prices than currently expected.
• Higher energy prices could raise euro-area inflation further and spill over to non-energy inflation more than assumed in the baseline.
• The war could disrupt global supply chains more broadly, exacerbating inflation pressures.
• Ongoing trade tensions might fragment global supply chains, curtail supply of critical raw materials, and tighten capacity constraints in the euro area economy.
• Inflation expectations and wage growth increases could reinforce and make inflation more persistent.
• Downside risk: Inflation could be lower if the war's economic repercussions are short-lived or if second-round effects are less pronounced.
• This assessment follows the ECB's decision to keep interest rates on hold, indicating cautious monitoring of upside risks.
• The focus is on euro-area-specific inflation dynamics, with energy prices and supply chain disruptions as primary drivers.