ECB's Nagel: high inflation not yet setting off second-round effects

ECB’s Nagel: High Inflation Risks Remain, Energy Yet to Hit Wages

Bundesbank President Highlights Inflation Concerns and Energy Impact

Current Inflation Situation in the Euro Zone

SORRENTO, Italy, Oct 5 (Reuters) - Euro zone inflation is high and upward risks dominate but expensive energy has yet to feed through to wages and other prices, Bundesbank President Joachim Nagel said on Monday. 

Inflation in the 21-nation currency bloc is now running at 3.8%, nearly double the ECB's 2% target and could still increase, fuelling worries that soaring energy prices will eventually set off hard-to-break second-round effects, perpetuating rapid price growth without aggressive central bank action.

Wage and Price Setting Trends

"There are so far no clear signs that inflation has fed through to price and wage setting," Nagel said in a speech in Sorrento, Italy. "Longer-term market-based and expert expectations remain consistent with the Eurosystem’s 2% inflation target."

Ongoing Price Pressures and Energy Concerns

Still, Nagel did not sound the all-clear and warned that price pressures are expected to stay strong, even excluding volatile food and energy prices. 

Gas and Petroleum Price Vulnerabilities

"Gas prices are especially vulnerable because storage levels are low, and Europe may need to buy substantially higher volumes during the winter," Nagel told a precious metals conference. 

"The destruction of refining capacity is driving up prices for refined petroleum products significantly. Drought, wildfires and fertiliser shortages also pose risks to food prices," Nagel added.

Market Expectations for ECB Rate Hikes

This long list of risks is why financial markets expect the ECB to raise its 2.5% deposit rate another two or three times in the coming year on top of two hikes this past summer. 

Nagel, however, did not endorse market bets and merely said the ECB needed to be flexible and continue to make decisions based on incoming data.

Markets are pricing in a 20% chance of an interest-rate hike by the ECB in October and an 80% chance of an increase in December, according to LSEG data.

Asset Management and Diversification Strategies

Speaking about rising yields, Nagel said this was increasing the relative attractiveness of bonds among reserve asset managers.

Gold as a Diversification Option

However, the case for diversification into gold remains significant given continued geopolitical stress and the credit risk associated with high debt levels, he added.

(Reporting by Polina Devitt; writing by Balazs Koranyi, Editing by Xevi Fontdegloria)