Euro zone inflation has entered a new phase which could linger for some time, European Central Bank President Christine Lagarde said on Tuesday, outlining a lengthy fight against price growth that must dampen demand and force firms to curb prices.
The ECB has raised rates at each meeting over the past year, taking its deposit rate to 3.5%, and promised more tightening as soon as July as it attempts to curb inflation still running at three times its 2% target.
Workers, who lost their real earnings to inflation are now trying to recoup their losses, keeping inflation under pressure, a process that is amplified by lower than expected productivity growth, she said. Another issue is that much of the recent employment growth is in sectors with low productivity growth, so high nominal income growth comes with weak efficiency gains.
"We need to ensure that firms absorb rising labour costs in margins," Lagarde said. "This hinges on our policy dampening demand for some time so that firms cannot continue to display the pricing behaviour we have recently seen."
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