Nagel Warns of Persistent Euro Zone Inflation Risks

Bundesbank President Joachim Nagel has cautioned that while Euro zone inflation remains high at 3.8%, nearly double the European Central Bank’s 2% target, there are currently no clear signs of second-round effects where rising prices feed into wages and other costs.

Speaking at a precious metals conference in Sorrento, Italy, Nagel emphasized that longer-term inflation expectations still align with the ECB’s target. However, he warned of persistent price pressures, particularly in energy markets, where storage levels are low and Europe may need to purchase higher volumes of gas during winter.

Nagel also highlighted other inflationary risks, including the destruction of refining capacity driving up petroleum product prices, as well as droughts, wildfires, and fertilizer shortages impacting food prices. Despite these challenges, he did not explicitly endorse market expectations for further interest rate hikes, instead advocating for a flexible approach based on incoming data.

Financial markets are currently pricing in a 20% chance of an ECB rate hike in October and an 80% chance in December. Nagel also noted that rising bond yields are making fixed-income assets more attractive, though he stressed the continued importance of diversification into gold due to geopolitical risks and high debt levels.