In view of the rapid rise in prices, the European Central Bank (ECB) must remain extremely vigilant with regard to inflation risks, according to its director Isabel Schnabel.

The rise in prices is likely to last longer than originally assumed, the German monetary watchdog admitted on Wednesday.

The rate of inflation will decline in 2022.

But it is uncertain how quickly and to what extent this decline will take place in the coming year.

Therefore, the ECB must be prepared for all eventualities in order to fulfill its mandate of price stability.

There is broad agreement that the exploding energy costs and base effects from Corona year 2020 are driving prices: "But there is less agreement about the duration of these price drivers and what they mean for an appropriate response from monetary policy," she added. Schnabel thus indicated that the monetary authorities are divided on this issue.

This note, which is astonishing for observers, comes a few weeks before the landmark meeting of the ECB on the future of the PEPP corona emergency program, which is due in mid-December.

Many experts expect it to expire in March and after that the smaller APP program will continue in one form or another.

In view of the inflation risks, ECB Council member Klaas Knot called for flexibility with a view to this.

One should not commit oneself too early in order not to run the risk of coming into conflict with the inflation trend.

The monetary authorities have already agreed that an interest rate hike will not be considered until the APP program has ended.

Bond purchases as a signal for interest rate policy

Schnabel now explicitly pointed this out. There are good monetary policy reasons to adhere to this sequence. At the same time, the bond purchases would serve as a signal for interest rate policy. Even if they were to continue at a relatively low level, this could indicate to the markets that an interest rate hike is not on the cards. On the one hand, tightening monetary policy too early, which would damage the economy, said the Dortmund economist. On the other hand, it is important to keep a “watchful eye” on the upside inflation risks that have already been anticipated on the financial markets, explained Schnabel.

At the same time, it does not see a phase of weak growth and increased inflation approaching the euro area. Some observers painted this specter of stagflation on the wall. But a development like the one caused by the oil crisis in the 1970s is not now emerging. The fear of stagflation is therefore unfounded.

The economy in the euro area and globally is now much better equipped to deal with such price shocks, said Schnabel. This is also because consumers had enough money at their disposal and the states supported the economic recovery with their budgetary policies. In the 1970s, the oil cartel OPEC cut production, causing the oil price to double within two years, which led to an economic standstill with rising unemployment and a sharp rise in inflation.

The made-up word stagflation has come back into vogue due to the currently rapidly rising consumer prices: The inflation rate in the euro area was 4.1 percent in October, the highest it has been in over 13 years.

According to Schnabel, the end of the story has not yet been reached: November will see the highest rate of price increases since the introduction of the euro in 1999.