Europe’s record inflation doesn’t show overheating: Draghi

Bloomberg

Italian Premier Mario Draghi said surging inflation in Europe doesn’t reflect excess demand, and there’s still spare capacity to be found in the region’s economy.
The former European Central Bank president spoke out on the day that officials led by his successor, Christine Lagarde, are set to stop bond purchases and firm up plans for interest-rate increases to stop record consumer-price increases from spiraling out of control.
“In the European Union, rising inflation is not wholly the sign of overheating, but largely the result of a series of supply shocks,” he said at the annual ministerial meeting of the OECD in Paris. “Wages must recover their purchasing power, but without creating a price-wage spiral that would result in turn in even higher interest rates.”
Italian officials are bracing for the impact of monetary tightening pushed for by policy makers from Northern Europe. Some have aired the possibility of a half-point rate move matching the most recent increase by the US Federal Reserve.
Last week, Bank of Italy Governor Ignazio Visco called for such hiking to proceed in an “orderly” way to avoid threatening integrity of the euro zone.
Draghi pointed out that while euro-area inflation was 8.1% in May, once food and energy are excluded “the increase is only about half of that — a significant jump but much less than in the US.”
He also noted that unemployment is just below 7% and consumption remains below its pre-pandemic levels.
“These are all signs that there is still spare capacity in the economy,” said Draghi, who never raised rates himself during an eight-year stint as ECB chief dominated by successive bouts of stimulus.
Lagarde is scheduled to hold a press conference at 2:30 p.m. in Amsterdam after the Governing Council decision.