ECB President Lagarde said that persistent supply chain bottlenecks and rising energy costs are slowing Eurozone growth and will keep inflation high for even longer than previously predicted.
The ECB is betting on a sharp drop in inflation next year, but policymakers are now publicly admitting that their predictions are still too low as the global economy takes a toll.
However, Lagarde resisted calls and market bets for tighter policy, underlining the ECB's message that conditions for higher interest rates are unlikely to be reached next year because inflation is expected to fall below the bank's 2% objective.
"Shortages of materials, equipment, and labour are weighing on manufacturing production, worsening the near-term outlook," she said.
Inflation rose to 4.1% last month and is expected to rise to near 4.5% by the end of the year, before a gradual decrease that will only get it back under the ECB's target towards the end of 2022, economists forecast.
Lagarde went on to say that the bottlenecks are likely to ease next year, and that energy futures are also forecasting a significant drop, implying that inflation will fall even if price normalisation takes longer. "We still expect inflation to moderate in the coming year," Lagarde said, "but it will take longer than we had anticipated."
The ECB expects average annual inflation to fall below 2% next year, a figure that is likely out of date, as private estimates, as well as those from the European Commission, all point to price increases above 2%.
Lagarde noted that wages may respond to inflation, but reiterated that the ECB does not expect price growth to persist due to so-called second-round effects. "We expect wage growth to be slightly higher next year than this year," she said, "but the risk of second-round effects remains low."