ECB's Nagel Warns of Persistent Inflation Risks Despite No Clear Second-Round Effects

Bundesbank President Joachim Nagel warned that while euro zone inflation remains high, there are no clear signs yet of second-round effects where rising prices feed into wages and other costs. Speaking at a conference in Sorrento, Italy, Nagel noted that inflation in the 21-nation currency bloc stands at 3.8%, nearly double the European Central Bank's 2% target. He cautioned that energy costs, particularly gas prices, remain a major risk due to low storage levels and potential winter demand.

Nagel highlighted several other factors contributing to inflationary pressures, including the destruction of refining capacity, droughts, wildfires, and fertilizer shortages. Despite these risks, he emphasized that longer-term market-based and expert expectations still align with the ECB's 2% inflation target. However, he cautioned that price pressures are expected to remain strong even when excluding volatile food and energy prices.

Financial markets anticipate further interest rate hikes by the ECB, with a 20% chance of a rate increase in October and an 80% chance in December, according to LSEG data. Nagel, however, did not endorse these market bets, stressing the need for flexibility and data-driven decisions. He also noted that rising bond yields are making fixed-income investments more attractive for reserve asset managers, while geopolitical stress and high debt levels continue to support the case for diversification into gold.