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Eurozone central bank chiefs warn on soaring inflation expectations

The heads of the French and German central banks have said that businesses and households increasingly believe prices will continue to rise, raising the likelihood that inflation in the eurozone’s two largest economies will remain uncomfortably high for years to come.

Businesses and consumers in Germany and France expect inflation to be higher for longer than six months ago, new research from the Bundesbank and Banque de France found that heads Joachim Nagel and François Villeroy de Galhau described Thursday as “worrying” and “bad”. news”.

Inflation in the eurozone is now at 8.1 percent, the highest since the introduction of the single currency and more than four times the European Central Bank’s 2 percent target.

The jump in inflation expectations in the eurozone’s two largest economies is challenging for ECB rate setters as it complicates their efforts to bring price growth back to the 2% target. When companies expect inflation to remain elevated for longer, they are more likely to raise prices, while workers are more likely to demand higher wages to offset their loss of purchasing power. This threatens to create a 1970s-style wage-price spiral that will keep inflation high.

German households, hard hit by food and energy price hikes following Russia’s invasion of Ukraine, now expect inflation in the country to average 5.3 percent over the next five years, according to a Bundesbank survey. Nagel, who became president of the Bundesbank in January, said at a joint conference with the Banque de France that the survey revealed the risk that the ECB would react to rising prices “too little, too late”.

The Banque de France also published data for the first time in a poll of business leaders showing they now expect French inflation of 5 percent a year – up from a forecast of 3 percent at the end of last year.

Governor Villeroy de Galhau said the data includes both “good news” and “bad news,” citing the fact that business leaders expected inflation to average “just” 3 percent over the next three to five years as evidence of the latter.

Businesses in Germany expect inflation to average 4.7 percent over the next five years, up from 3.4 percent at the start of the year. Nail said the data was “worrying” as it suggested expectations of future inflation were becoming “less entrenched.”

the ECB mention inflation expectations are rising above target and wages are rising faster than expected as two of the upside risks to price growth after the meeting two weeks ago when it announced plans to raise interest rates next month for the first time since 2011. Villeroy said he hoped the ECB’s plan would lower inflation expectations. He also distanced himself from the ECB’s goal of raising interest rates “gradually”, saying he preferred the word “orderly”.

Inflation expectations in the eurozone’s two largest economies are now approaching those in the US, where households expect price growth of 4.8 percent in three years, up from 3 percent two years ago, according to a New York Fed. -survey.

The Federal Reserve, unlike the ECB, has already aggressively raised interest rates, raising the federal funds target by 75 basis points earlier this month to a target range of 1.50 to 1.75 percent. The ECB’s benchmark for deposits remains at minus 0.5 percent, but is likely to rise above zero in September.

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