ECB Chief Economist Warns 'Second Wave' of Energy Costs to Keep Inflation Elevated

A fresh surge in energy costs is fueling a "second wave" of price pressures that will likely keep euro zone inflation elevated for longer than previously anticipated, European Central Bank Chief Economist Philip Lane said in an interview with Le Temps newspaper on Tuesday.

A More Persistent Inflation Outlook

Lane warned that the euro area is experiencing a new round of energy-driven inflation. "We are now witnessing a second wave of price rises, not only in oil but also in gas," he stated. According to the chief economist, this will have broad effects on the economy.

He noted that this second wave is expected to exert upward pressure on food prices, electricity, and goods in general, while pressure on services should remain more contained. As a result, Lane said, "this second wave of energy price rises should lead to higher and more persistent inflation, before a decline toward our target from mid-2027 onwards."

The ECB’s latest official forecasts project inflation at 3% for the current year and 2.5% for the next, both significantly above the central bank's 2% target. Near-term inflation is projected to reach around 4%.

Implications for Monetary Policy

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The comments reinforce the ECB's hawkish stance as it battles persistent inflation. The central bank has already raised interest rates twice since a recent conflict-driven surge in energy costs, and policymakers have signaled that further monetary tightening is likely.

Investors are now watching for a potential additional quarter-point rate increase as early as the ECB's October meeting. Lane's assessment suggests that the underlying price pressures may require borrowing costs to remain higher for an extended period to bring inflation back to target.

Economic Growth Risks

While the baseline scenario is for the European economy to "continue to grow at a steady but moderate pace," Lane cautioned this outlook is contingent on the energy shock not intensifying. He identified a key downside risk, warning that "a shock that proved more intense and more persistent this autumn would weigh on the economy."

However, Lane also pointed to several positive factors that could support growth in a less severe scenario. These include substantial public spending initiatives, such as Germany's infrastructure and defense investment program and the European Union’s NextGenerationEU plan.