Nagel warns of persistent inflation risks in Euro zone

Euro zone inflation remains high, with risks of further increases, but it has not yet triggered widespread second-round effects such as wage hikes, according to Bundesbank President Joachim Nagel. Speaking 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. While energy prices have surged, they have not yet fed through to broader price and wage settings. Longer-term market expectations, however, remain aligned with the ECB’s inflation target.

Nagel warned that price pressures are expected to stay strong, even excluding volatile food and energy prices. He highlighted several risks, including low gas storage levels, the destruction of refining capacity, and disruptions from drought, wildfires, and fertilizer shortages. These factors could drive up energy and food prices further, particularly during the winter months.

Markets are anticipating further ECB rate hikes, with a 20% chance of a hike in October and an 80% chance in December, according to LSEG data. Nagel did not endorse these market bets but emphasized the need for flexibility and data-driven decisions. He also noted that rising bond yields are making bonds more attractive to reserve asset managers, while gold remains a significant diversification option due to geopolitical stress and high debt levels.