ECB’s Lane: Prolonged conflict could lead to a substantial spike in inflation

European Central Bank (ECB) chief economist Philip Lane said on Tuesday that a prolonged conflict could lead to a substantial spike in inflation. At the same time, it could also cause a sharp drop in output in the euro area. 

Key quotes

Prolonged conflict could lead to a substantial spike in inflation. 

At the same time, it could also cause a sharp drop in output in the euro area. 

Directionally, a jump in energy prices puts upward pressure on inflation especially in the near-term. 

The magnitude of the shock heavily depends on the breadth and duration of the conflict.

Barring any major shocks, euro area economy is growing in the neighbourhood of its potential. 

Even when taking out any energy price volatility, inflation is still running above the 2% medium-term target. 

This is not an environment where I see an argument in favour of taking a bit of risk on inflation. 

Market reaction  

At the time of writing, EUR/USD is trading 0.16% lower on the day at 1.1670.