ECB chief economist sees persistent impact on inflation from Iran war
While oil prices have historically tended to return to their original levels following a boom, the current situation may be different as energy costs may remain high as countries restock or diversify their energy mix, he said.
“We had a pretty rapid and large drop in global oil supply overnight, and that’s been masked by inventories so far,” Lane told a conference in Tokyo organized by the BOJ and its think tank. he said.
Also read: European Central Bank warns that fallout from Iran war increases Europe’s financial fragility
“Even if the initial energy shock begins to reverse, the second round (of effects) will be with us for some time,” he said. With the energy shock pushing prices higher, financial markets have fully priced in two increases in the ECB’s 2% deposit rate and see a roughly 50% chance of a third move next year. Economists are more cautious, predicting only two increases, followed by a cut in mid-2027, according to a Reuters poll.
Some policy lessons can be learned from past energy shocks, Lane said, as rising energy costs can spike inflation and cause “all sorts of nonlinear” mechanisms that widen price increases.
“But it’s not the same nonlinearity we had four years ago,” Lane said, when supply disruptions from the Ukraine war and strong demand from Covid-19 reopenings pushed inflation up. Lane said central banks should acknowledge significant shocks and their potential impact on inflation, but avoid overreacting when setting monetary policy.
“You have to be adept at looking at monetary transmission, consumer confidence, all these different mechanisms,” he said.
While some inflationary pressures from the supply shock may calm over time, it was important for central banks to make sure “there is no persistent belief in the population or among price-setting sectors that inflation will be too high for too long,” he said.
