ECB Warns of Elevated Inflation Risks from Rising Energy Costs

Bundesbank President Joachim Nagel has warned that elevated energy costs in the eurozone pose risks to the inflation outlook, though broader wage and price pressures have not yet materialized. Speaking on Monday, Nagel noted that inflation in the 21-member eurozone remains at 3.8%, nearly double the European Central Bank’s (ECB) 2% target. While higher energy prices have not yet triggered second-round effects, Nagel cautioned that inflationary pressures could persist even after excluding volatile food and energy components.

Nagel highlighted several concerns, including low European gas storage levels, disruptions in refining capacity, and weather-related risks such as droughts and wildfires. These factors could further drive up prices for refined petroleum products and food. Despite these risks, longer-term inflation expectations remain broadly aligned with the ECB’s 2% target, with no clear signs that higher inflation has become embedded in wage and price-setting decisions.

Financial markets have strengthened expectations of further ECB rate hikes, with a 20% probability of an increase in October and an 80% probability in December. Nagel, however, stressed the need for flexibility, emphasizing that monetary-policy decisions should be based on incoming economic data rather than market expectations.

Nagel also discussed rising bond yields, noting that higher yields improve the relative attractiveness of bonds for reserve-asset managers. He added that gold remains an important diversification option amid persistent geopolitical tensions and credit risks linked to elevated government debt levels.