Euro-area growth is barely positive. Inflation just sped up to 3%, and one of the ECB's most influential voices is putting a name to it: stagflation.
Olli Rehn, head of Finland's central bank and an ECB Governing Council member, said Wednesday that the bloc is showing "first signs" of a stagflation shock. That's the rare mix of slowing growth and rising prices central banks dread.
Rehn pointed to two data points from the first quarter: growth that was barely positive and inflation that picked up to 3%. He said the shift is already visible in the statistics.
He also said this is not 2022, when energy prices surged after Russia invaded Ukraine and the ECB had to chase inflation with rapid rate hikes. This time the trigger is different.
The Middle East conflict and the threat to oil flow through the Strait of Hormuz are doing the work. Rehn said monetary policy should not be set on oil prices alone.
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Rehn laid out three possible ECB responses, each tied to how long and how severe the energy shock turns out to be. The lightest path is no action if the price spike fades on its own.
A middle path means waiting to see if higher energy costs feed into wages and longer-term inflation expectations. The heaviest path involves tightening quickly if inflation looks like it's drifting away from the 2% target for good.
Rehn also warned against repeating the 2011 mistake, when the ECB hiked rates in response to an energy spike and then had to reverse course as the broader economy weakened.
Markets are already moving ahead of the ECB. Traders are pricing an 86% chance of a rate hike at the June meeting and three hikes by year-end.
Survey data is leaning the wrong way too. Consumer inflation expectations one year out jumped to 4% in March, up from 2.5% in February, the kind of move that tends to push central banks to act sooner rather than later.
The June meeting is when investors find out which of Rehn's three paths the ECB picks.
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