Lagarde Warns Higher Energy Prices Pose Inflation Risks in Euro Area

European Central Bank (ECB) President Christine Lagarde warned that higher energy prices are raising inflation risks in the euro area. Speaking at a European Parliament hearing, she noted that while there's no evidence of energy costs feeding into stronger wage growth, the current outlook is surrounded by uncertainty.

The ECB raised its key interest rates by 25 basis points earlier this month in response to higher energy prices. Lagarde explained that the central bank doesn't react directly to energy prices but rather to the risk that they could become embedded in inflation. She pointed out that euro area headline inflation rose to 3.2 percent in August, while energy inflation climbed to 14.3 percent from 10.3 percent.

The ECB's September staff projections indicate that headline inflation is expected to average 3.0 percent in 2026, 2.5 percent in 2027, and 2.1 percent in 2028. Economic growth is projected at 0.9 percent, 1.4 percent, and 1.5 percent over the same period.

Lagarde emphasized that while a measured policy response remains appropriate to keep inflation in check, the energy shock is too large to be ignored.