FRANKFURT, Germany — European Central Bank leadership expressed concerns Wednesday that companies might accelerate price increases following oil market disruptions from the Iran conflict, drawing on painful lessons from the inflation crisis that followed Russia’s 2022 Ukraine invasion.
ECB President Christine Lagarde warned during a Frankfurt conference that if petroleum and natural gas costs keep climbing, “the response of firms and workers may be faster than last time.”
“We have a more recent memory of high inflation, which could affect how quickly costs are passed on and compensation is sought,” Lagarde explained.
Despite the ECB’s success in controlling the 2022 inflation surge through elevated interest rates, “that experience has left a mark,” she noted. “An entire generation has now lived through its first episode of high inflation — and it may not be as slow to react a second time.”
Countries using the euro currency saw inflation reach 10.6% in October 2022 after Russia’s invasion cut off most natural gas supplies and temporarily drove oil costs higher. By February, inflation had dropped to 1.9%, according to Eurostat data.
Lagarde emphasized that monetary policy cannot reduce oil prices directly, noting that central banks usually ignore temporary energy spikes without adjusting interest rates. Rate increases only become necessary when higher energy costs begin affecting other goods and worker wages, creating a price spiral.
“If the energy shock is seen to be limited in size and short-lived, the classical prescription of looking through should apply,” she stated, explaining that by the time rate changes take effect after months of delays, inflationary spikes typically disappear.
Central banks generally increase rates to combat inflation, cooling price growth by making borrowing more expensive for mortgages and business expansion projects.
She suggested the current oil price jump might prove less inflationary than expected, since the energy cost spike remains smaller than Europe’s 2021-2022 experience.
However, if inflation appears headed persistently above the ECB’s 2% goal, “the response must be appropriately forceful or persistent.”
Lagarde said determining the appropriate response remains premature. “We will monitor developments closely and set monetary policy as appropriate.”
The ECB maintained its key interest rate at 2% during its March 19 policy meeting.
