According to ECB vice-president Luis de Guindos, the recent spike in Eurozone inflation has a structural driver in supply disruptions, and the ECB must keep an eye out for any signs of pay rises. Officially, the ECB expects inflation in the Eurozone, which hit 3.4% last month, to fall back below its 2% target next year, but many inside the bank believe inflation will be more difficult to control.
De Guindos echoed the ECB's forecasts, but warned that some of the current inflation drivers, such as supply constraints and increased energy costs, were having a "structural" impact and could affect employees' perceptions and pay demands.
"This increase in inflation is not only responding to base effects; there is also a component that will have a greater structural impact," de Guindos said, "this is having a far greater impact than we anticipated only a few months ago."
He went on to say that the ECB's monetary policy reaction would have to change if inflation became permanent as a result of these variables persisting longer than planned, or if they began to influence wage negotiations.
"For the time being, we haven't seen significant salary rises in the labour market," de Guindos added, "however, we must exercise caution and care since salary negotiations are only getting underway, and the perception of inflation is becoming more apparent as time passes."
Several ECB policymakers were braced for inflation to exceed the bank's previously higher predictions of 2.2% this year, 1.7% next year, and 1.5% in 2023, sources said last month. According to the sources, this was considered as paving the way for the bank to terminate its emergency bond purchases in March. The decision is expected in December.
De Guindos said the ECB's Pandemic Emergency Purchase Program would "achieve its purpose" if economic activity returned to normal and the pandemic subsided.