Euro zone facing increased inflation volatility, Lagarde says

SINTRA, Portugal (Reuters) -Uncertainty is bound to remain a key feature of the global economy, likely making inflation more volatile and requiring the ECB to act more forcefully to keep prices around its target, ECB President Christine Lagarde said on Monday.

The ECB unveiled an updated strategy on Monday and concluded that major deviations from its target in either direction would require "appropriately forceful or persistent" policy action to ensure price growth comes back to 2%.

Explaining this conclusion, Lagarde argued that the global environment had changed fundamentally in the post-pandemic years, as firms changed prices more quickly in this new period of uncertainty and supply shocks.

"The world ahead is more uncertain – and that uncertainty is likely to make inflation more volatile," Lagarde told the ECB Forum on Central Banking in Sintra, Portugal.

Inflation in the euro zone is now around 2%, right on the bank's target, after a decade of first undershooting this figure despite massive stimulus, then overshooting it.

While the ECB sees inflation staying around these levels over the next several years, Lagarde admitted there were risks as corporate pricing behaviour has changed.

"Firms tend to react more quickly to shocks – especially supply ones – in order to protect against potential future losses," Lagarde said in a speech. "They are more likely to adopt more flexible pricing strategies, which means prices may respond not just to major shocks, but also to smaller frictions and local disruptions."

Another problem was that pricing adjustment may not be linear, meaning that inflation could quickly accelerate or slow.

The way to tackle such risks, Lagarde argued, was by acting forcefully early, including tightening policy quickly to prevent a feedback loop between prices and wages.

Similarly, early action against too-low inflation would minimise the time the ECB would have to spend at ultra-low interest rates.

(Reporting by Balazs Koranyi; Editing by Alex Richardson)