Makhlouf: Inflation pressures persist, outlook uncertain
Central Bank of Ireland Governor Gabriel Makhlouf discussed the European Central Bank's recent rate hike and persistent inflation pressures. Speaking in Dublin, he outlined an uncertain economic outlook for the euro area and Ireland.
Energy shock fuels euro area inflation
The European Central Bank's Governing Council unanimously decided to raise the deposit facility rate by 25 basis points to 2.25 percent.
This marks the first rate increase since 2023, responding to inflation pressures stemming from higher oil prices and supply disruptions due to the Middle East conflict.
Governor Makhlouf emphasized the commitment to the 2 percent inflation target.
The conflict has delivered a significant supply-side shock, causing oil prices to remain volatile and energy-intensive product prices to jump.
Euro area headline inflation reached 3.2 percent in May, up from 1.9 percent in February, with energy inflation contributing nearly 11 percent.
Global supply chain pressures intensified in March and April, indicating further upward price pressures across sectors, including retail, services, industry, and construction.
Demand weaker than 2022
Makhlouf contrasted the current situation with the 2022 energy shock, which occurred during a strong post-pandemic recovery with tight labor markets and robust demand.
Today, euro area demand is significantly weaker, with GDP growth revised down, falling consumer confidence, and hesitant private investment.
The latest shock also impacts European manufacturers, who face increased competition from China's high-tech exports.
This weaker demand environment means firms find it harder to pass on increased costs, and workers have less bargaining power, potentially leading to a weaker pass-through of oil shocks to consumer prices compared to previous episodes.
No easy answers for inflation
Despite the rate hike, Makhlouf cautioned against a 'this time is different' narrative, citing persistent upward price pressures and potential long-term energy supply disruptions.
He highlighted that consumers' short-term inflation expectations have sharply risen, making them highly sensitive to price changes.
The path ahead remains genuinely uncertain and data-dependent, with the rate increase serving as a necessary step to guide inflation back to target amidst complex and evolving global dynamics.