Nagel Warns of Persistent Inflation Risks in Euro Zone

Bundesbank President Joachim Nagel cautioned 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 precious metals conference in Sorrento, Italy, Nagel noted that inflation in the 21-nation bloc is currently at 3.8%, nearly double the European Central Bank’s 2% target. He emphasized that market-based and expert expectations still align with the ECB’s long-term inflation goal.

Despite the absence of second-round effects, Nagel warned that price pressures are likely to persist, even excluding volatile food and energy prices. He highlighted several risks, including low gas storage levels, damage to refining capacity, and potential disruptions to food prices due to drought and wildfires. These factors contribute to the uncertainty surrounding inflation and economic stability in the region.

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. However, Nagel did not explicitly endorse these expectations, stating that the ECB must remain flexible and base decisions on incoming data. He also noted the rising attractiveness of bonds due to higher yields but emphasized the continued importance of diversification into gold amid geopolitical stress and high debt levels.