US economy

ECB can't be lenient with structural inflationary forces, Nagel says

FRANKFURT (Reuters) – Deep structural changes in the euro zone economy could put upward pressure on inflation for years to come but the European Central Bank should still not tolerate quicker price growth, Bundesbank President Joachim Nagel said on Tuesday.

Inflation had been stuck below 2% for most of the past decade but economists argue that these ultra low levels are unlikely to return even after the central bank defeats the current bout of rapid price growth.

Nagel said that greater supply chain resilience, which comes at a cost, looming labour shortages amid a demographic decline and the green transition could all put upward pressure on prices.

“To improve resilience, some form of de-risking seems reasonable, especially in the case of strategically important goods,” Nagel said in a speech. “We should keep in mind that greater security for supply chains is likely to come with some additional price pressures.”

Germany’s labour market is also an issue and Nagel estimated that the potential labour force will decline by 80,000 per year from 2026, putting upward pressure on wages and thus prices.

Still, Nagel said that these inevitable changes should not increase the ECB’s tolerance for inflation, which it now targets at 2% a year.

“One thing is clear: Our mandate is price stability!” he said. “If there is more price pressure in the medium-term, we must take action against it… price stability is a prerequisite for an efficient adjustment process.”


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