European Central Bank (ECB) President Christine Lagarde confirmed that second-round inflation effects are now visibly filtering through the Eurozone economy.
Thank you for reading this post, don't forget to subscribe!The announcement follows the ECB’s recent 25-basis-point interest rate hike, lifting the deposit rate to 2.25%—its first increase in nearly three years. The aggressive move comes in direct response to severe energy shocks and shipping bottlenecks triggered by the ongoing conflict in the Middle East.
Breaking Down “Second-Round Effects”
While first-round effects are the immediate price spikes from a supply shock (like a sudden surge in oil or gas prices), second-round effects happen when inflation embeds itself into the core DNA of the economy:
- The Wage-Price Spiral: Higher living costs prompt workers to demand wage increases, driving companies to raise retail prices further to protect profits.
- Core Contagion: Price hikes leak heavily into sectors entirely unrelated to energy, such as services, retail goods, and recreation.
Key Takeaways from Lagarde’s Briefing
- Services Inflation is Spiking: The shock is no longer just about fuel. While energy inflation hit 10.9% in May, services inflation jumped sharply from 3.0% to 3.5%, proving that domestic price pressures are hardening.
- Avoiding Past Mistakes: The ECB is determined not to repeat its 2022 policy misstep, when it dismissed post-COVID inflation as “transitory.” Officials explicitly stated that the risk of letting inflation run wild is far more dangerous than the risk a minor rate hike poses to economic growth.
- The Long Road to 2%: Latest Eurosystem projections show headline inflation averaging 3.0% in 2026 and 2.3% in 2027, with expectations to finally hit the 2.0% target by late 2027.
The Bottom Line: “The longer energy prices stay high, the more likely they are to drive up broader inflation through indirect and second-round effects.” — ECB Statement
What’s Next?
While Lagarde kept future policy moves close to her chest, the clear acknowledgment of second-round effects has led markets to heavily price in at least one more quarter-point rate hike before the end of the year.
Editing by- katie willimas
