ECB’s Nagel: No clear signs that inflation has fed through to price and wage setting

Joachim Nagel, a policymaker at the European Central Bank (ECB) and President of the Bundesbank, made a speech in Sorrento, Italy regarding the inflation situation in Europe. During his speech, Nagel stated that there are no clear signs that the inflation driven by energy shocks has started to affect wage growth. Market expectations and expert forecasts continue to align with the Eurosystem's 2% inflation target.

The ECB policymaker emphasized that upward risks are currently dominant in the inflation outlook, calling for a stance of flexibility rather than inaction. This warning comes as gas prices are particularly susceptible to fluctuations due to low storage levels. Additionally, the destruction of refining capacity is causing a significant increase in the cost of refined petroleum products.

Drought, wildfires, and fertilizer shortages also pose risks to food prices, increasing the relative attractiveness of bonds among reserve asset managers. The case for diversification into gold remains significant due to ongoing geopolitical stress and the credit risk associated with high debt levels. Despite these concerns, the ECB's decision to deliver a stronger-than-usual signal resulted in a moderate hawkish shift, as indicated by the FXS Speechtracker score of 7.2/10, which is higher than the historic average of 6.6/10.

The ECB's focus on the dominance of upward risks in the inflation outlook suggests that the bank is likely to maintain a cautious approach to policy easing, which is expected to support the Euro. However, the statement that "no clear signs that inflation has fed through to price and wage setting" temper the hawkish tone, showing that the ECB is mindful of the uncertainty surrounding the inflation transmission mechanism.