With eurozone inflation reaching new highs and German inflation falling, where is the ECB going this year?

Reporter | Wang Pinda

Eurozone inflation continued to rise in December, setting a record for two consecutive months. At the same time, Inflation in Germany has fallen for the first time in half a year. This has once again thrust the relatively accommodative monetary policy pursued by the European Central Bank since last year into the spotlight.

Data released last week showed the Eurozone's Harmonized Consumer Price Index (HICP), a measure of inflation, rose 5.0 percent year-on-year in December to 4.9 percent in November, the highest since the euro zone was established at the end of the last century. Among them, energy prices still rose the fastest, but the increase fell to 26.0% from 27.5% in November, followed by food, tobacco and alcohol (3.2%), non-energy industrial products (2.9%), and services (2.4%).

Meanwhile, Germany's HICP index fell from 6.0% to 5.7% year-on-year in December, still much higher than the ECB's 2% inflation target, but the first decline in six months. However, Germany's domestic consumer price index (CPI) for December rose 5.3% year-on-year, slightly higher than the previous month's 5.2%. France, the eurozone's second-largest economy, rose 3.4 percent year-on-year in December, unchanged from the previous month.

The data sends an uncertain signal to the eurozone's inflation outlook. On the one hand, inflation in the euro area continues to rise, with inflation rising sharply in larger economies such as Italy and Spain. On the other hand, inflation in Germany and France, the euro zone's two largest economies, is showing signs of peaking or even beginning to recede. Coupled with the official inauguration of Germany's new central bank governor this week, the ECB's recent relatively loose monetary policy has been on the cusp.

Unlike central banks in the United States and the United Kingdom, the European Central Bank has been adopting a policy of no tightening in the face of high inflation last year, insisting that current inflation is caused by temporary factors during the epidemic and will soon fall back in the future. It wasn't until December that the ECB decided to scale back the Emergency Anti-Epidemic Bond Purchase Program (PEPP) to end it in March. But the ECB has also significantly expanded its regular asset purchase program (APP) in order to achieve a "smooth transition" in monetary policy.

ECB President Christine Lagarde has also spoken out several times last year against immediate austerity. She believes that monetary policy has been delayed by about 18 months from its formulation to its effectiveness, by which time inflation has already fallen, resulting in a counterproductive tightening policy.

Meanwhile, the U.S. and the Bank of England have begun to tighten in both words and deeds. The Fed accelerated its bond-buying cuts and raised expectations of interest rate hikes in December. Fed Chairman Jerome Powell said at a Senate hearing on Tuesday that the current U.S. economy does not need strong support from central bank policy, will raise interest rates more times this year if necessary, and may begin to shrink the balance sheet later this year. The Bank of England also decided to raise interest rates for the first time in December.

And with the inauguration of the new bundesbank president Joachim Nagel on Tuesday, the debate within the ECB over austerity has intensified. Jens Weidmann, the last bundesbank president, was a well-known hawk at the ECB. Weidmann was one of only five of the 25 members of the ECB's Governing Council who voted against the December policy decision. His ten-year call for the ECB to tighten was fruitless, and he eventually resigned at the end of last year with five years left in his term.

And Nagel's inaugural speech suggested that he was likely to be a monetary policy hawk like Weidmann, continuing to fight the dominant doves within the ECB. "High inflation can indeed be attributed to some special effects that will automatically disappear in the future, but not entirely." Nagel said, "I think there is a danger that high inflation will last longer." ”

Nagel also stressed that he would continue the policy style of his predecessor Weidmann as central bank governor, warning that high inflation would take the most from the poor. "The German people rightly expect the Bundesbank to be a staunch supporter of a culture of stability. I assure you that the Bundesbank will continue to do so in the future. Nagel said.

Also on Tuesday, Philip Lane, the ECB's chief economist, said that Inflation in Europe would fall sharply this year, falling below the ECB's 2% inflation target next year and the year after. He argues that the upside risks to inflation are mostly exaggerated, and that in general, successive wage increases are considered a precursor to sustained high inflation, but the current wage increases in the euro area are not high.

ECB President Christine Lagaard also attended Nagel's inauguration ceremony on Tuesday and delivered a speech, but she did not directly address the controversy within and outside the ECB over whether to tighten or not, nor did she emphasize her previous relatively accommodative stance. She said only that people in the eurozone who are worried about rising prices can trust the ECB.

"We know a lot of people are very concerned about price increases, and we take it seriously." Lagarde said, "One can trust our firm support for the price stability target, which is key to anchoring inflation expectations and boosting monetary confidence." ”