ECB Chief Economist Philip Lane has asserted that falling energy prices could lead to lower core inflation due to reduced living costs and, consequently, restrained wage increases. However, he stressed the timeline and extent of this effect remain uncertain.

Speaking at a conference in Dubrovnik, Lane said, “I don’t think it’s symmetric… but when energy prices fall, core inflation does follow, because there is less pressure from an energy cost, there’s less pressure on the cost of living, therefore on nominal wage increases

“So, we do think this spectacular reversal of energy prices will feed into lower core, but the timeline for that and the scale of it is uncertain,” he added.

Lane further observed that wage growth is generally progressing at a moderate pace, with many people still bound to older contracts. “The latest deals are coming in at above 5%, but (this is in the) ballpark of what we expect,” he noted.

Despite this, he expects nominal wage growth to peak this year and suggested it would take real wages until 2025 to recover back to their 2019 level.

ECB chief economist Peter Praet said in a speech yesterday that “progress towards a sustained adjustment in inflation has been substantial so far.” And, “the underlying strength of the euro area economy, together with well-anchored, longer-term inflation expectations, provides grounds to be confident that the sustained convergence of inflation will continue in the period ahead, even after a gradual winding-down of net asset purchases.”

He discussed the three criteria of progress assessment: convergence, confidence and resilience. As for convergence, ECB staff projections expect headline and core inflation to hit 1.7% and 1.9% respectively in 2020. This is a “pattern of convergence” to target. Uncertainty on inflation outlook “has been declining significantly” and risk of deflation “has vanished”. Inflation expectations have been “gradually improving” and domestic cost pressures are “strengthening”. These provide improving confidence. Also, the protected inflation convergence has become ” progressively less reliant on further extensions of net asset purchases”, which shows improved resilience.

Praet also reiterated that “patience, prudence and persistence” are fully reflected in our latest monetary policy decisions. ECB announced in June to taper the asset purchase to EUR 10B per month after September, and end it after December, based on incoming data. Also, interest rates will remain at present level at least through 2019 summer.

Full speech of Praet “Ensuring a sustained adjustment in inflation”.

Bundesbank President Joachim Nagel said on Sunday, “If the data trend continues, more interest-rate increases have to follow — that’s already agreed in the Governing Council. We have to be determined, in October and beyond.”

Nagel added that interest rates are still “somewhat off the levels” to curb inflation. “We must bring inflation back under control,” he said. “We mustn’t let up, even if the economy worsens.”

On the German economy, he said that momentum will likely slow in Q3 and Q4, but he’s confident that it could avoid a steep slump.

In an interview with Spanish news agency Europa Press, ECB Vice President Luis de Guindos emphasized the significance of new macroeconomic projections in September, together with another two months of data on inflation and underlying inflation. These projections and data will help ECB reassess its monetary policy stance more effectively.

De Guindos stressed the importance of having more confidence that inflation will reach ECB’s target of 2% by the end of 2025, calling it the “key question.” He acknowledged the high level of uncertainty, stating that ECB must be “prudent” when making decisions.

He predicted that inflation will remain “around current levels until the end of the year” and observed that all measures of underlying inflation are declining. He added, “The disinflation process will continue from the start of next year.”

De Guindos also pointed out that wages are “starting to slow down,” and firms expect wage increases to moderate, particularly from 2025 onward. This moderation in wage increases is expected to lead to a reduction in services inflation, helping ECB achieve its 2% inflation target by the end of next year.