The ECB faces the inflation consequences if its own climate change policy

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by Shaun Richards

Today the Euro area is back in focus and let me take a moment to look back to Friday to note an interview with ECB President Christine Lagarde by CNBC. As ever there were some curious statements.

At the moment, we have been revising our projection upward rather than downward and the numbers that we are seeing at the moment lead us to believe that we are still in line with our projections.

This was in response to a question about signs of slowing in the German economy which we have been noting for a while. But as you can see in spite of claiming to look at the numbers President Lagarde has missed it.

We will have new projections in December so we’ll see at that time, but for the moment we are in synch and in line with our projection.

Then there was the curious story in the Financial Times about a forecast interest-rate rise in 2023.

What I know for a fact, because I know my Chief Economist and my colleague and friend, Philip Lane, is that he never would have said something like what was alleged to have been said.

So translating the political language that is an official denial so a yes. For out purposes the ECB is floating along projecting food news for the Euro area economy just as it is turning down which is quite a fail.

There was also the usual cherry-picking of the inflation numbers.

many of the causes of higher prices are temporary. When you look at what’s causing it, a lot of it has to do with energy prices. You look back a year ago, prices were rock bottom. They have of course moved up and the difference is explaining a lot of the inflation that unfortunately people are experiencing at the moment.

The problem here is that the usual central banking dismissal of non-core inflation is colliding with quite a surge that the ordinary person is having to pay.

Italy’s electricity prices jumped over 17% LAST WEEK. Wow – inflation anyone? This massive increase is clearly unsustainable and could lead to problems this winter in Italy ( @LorenBoston)

They have been rising since June and will collide soon with this from President Lagarde’s predecessor.

Future generations will ask themselves a simple question: ‘Why didn’t our parents act sooner to stop climate change?’ We must take action. We owe it to the citizens of today and, above all, to the citizens of tomorrow.” (Mario Draghi)

Continuing the theme there is this from Spain earlier today.

The annual rate of the general Industrial Price Index (IPRI) in August is of 18.0%, almost two and a half points above that registered in July and the highest since May 1980.

The Lagarde attempt to day that this is a result of last year has the problem of the monthly rise.

In August, the monthly variation rate of the general IPRI is 1.9%.

The energy price crisis of 2021 is reinforced by the fact that electricity prices rose by 7.5% on the month and gas prices by 8.3%.

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So we can move on with the ECB facing quite a crisis as there is clear inflationary pressure just as the economy is turning down.

The Money Supply Problem

The monthly update is really rather awkward for Lagarde.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, stood at 11.1% in August, compared with 11.0% in July.

So with inflation high and rising she is pumping it up even more. Also this comes on top of all the previous growth now in a reversal of here previous attempt to focus on “base effects”. By August last year the ECB had already pumped a lot of money into the system. The total amount of narrow money is just under 11 trillion Euros and at the present rate of growth will exceed that this month. The last 3 months have seen 121 billion, 64 billion and now 93 billion added.

If you take her line that growth is going well then there is another issue which is why is this needed? There is a more subtle point which relates to the detail.

It’s inevitable that in those circumstances there are bottlenecks. There is a shortage of supply relative to much higher demand.

So how will raising demand when supply is limited help? That is a recipe for higher prices and even more inflation.Even the Markit PMI business survey is picking this up.

Shortages once again fed through to a steep rise in
firms’ input costs. Across manufacturing and
services, input costs rose at the sharpest rate since
September 2000. Service sector input cost inflation
hit the highest since July 2008 while input price
inflation in manufacturing remained close to all-time

Also that it is being passed on.

Higher costs were commonly passed on to
customers. Measured overall, selling price inflation
accelerated in September, rising to the third-highest
rate seen over the past two decades, exceeded
only by the increases seen in June and July.

So the narrow money push will be in play over the next 3/6 months when we can expect more inflation. With the supply bottlenecks I wonder where the growth expected by Lagarde will come from and of course the past is not what it was.

Spanish GDP registered a variation of 1.1% in the second quarter of 2021 with respect to the previous quarter in volume terms. This rate is  1.7 lower than that advanced in 30th July.

So 1.1% is the new 2.8%.

Looking Ahead

The theory is that broad money growth predicts nominal growth around 18/24 months ahead.

The annual growth rate of the broad monetary aggregate M3 increased to 7.9% in August 2021 from 7.6% in July, averaging 7.9% in the three months up to August.

Again as a generic this looks inflationary. We all hope the supply shortages will fade and then end but the problem is that even in the Euro Boom growth was not much over 2%. So the rest will be inflation.

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By the standards of this measure growth has been remarkably even at 87,82 and now 75 billion Euros with a slight fading trend.


The ECB is facing not one but two nexus points right now and it does so at exactly the wrong time. Let me explain with reference to the Lagarde interview.

It has been very different from what I had expected in the first place. I wasn’t expecting a walk in the park, but I was expecting something more quiet than what we had.

I wrote about her appointment that Mario Draghi had set monetary policy for the next year or so for her. After all wouldn’t you when your replacement has not only a conviction for negligence but has been a factor in two major crises ( Greece and Argentina)? This first collided with the Covid pandemic and at first it was not too hard as all central banks eased policy. But now there is a choice between rising inflation and a slowing economy. What will she do? Personally I expect her to ignore the inflation but not everyone thinks that.

Next is the energy issue which is the next crisis at hand.

Energy is going to be a matter that will probably stay with us longer because we are transitioning as well from fossil-industry-driven sources of energy to what we aspire to be much less fossil sources. So that’s a transition that is in play.

You may have noticed that it is suddenly not temporary! But the issue here is a deeper one as readers will have different views on climate change but Lagarde is straight out of the political class who are determined to make it the driver of everything. Indeed they are driving prices higher.

The energy crisis in Europe presages trouble for the rest of the planet as the continent’s gas shortage has governments warning of blackouts and factories being forced to shut ( Bloomberg )


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