Santos Pereira: energy-led euro zone inflation has yet to broaden

The remarks reinforce the idea that the ECB can stay calm in the face of an energy-led price shock, easing near-term pressure to tighten and denying the euro any fresh lift from rate moves. Bond investors may take note of his view that rising yields reflect fiscal problems rather than inflation, because it implies the ECB regards the selloff as something for governments, not monetary policy, to deal with. That signals little appetite for using policy to push back against yields. Natural gas holds the key, and a cold beginning to winter would quickly put his relaxed view to the test, potentially reviving hawkish pricing.

Álvaro Santos Pereira serves as governor of Banco de Portugal, the nation's central bank, a role that gives him a seat on the ECB's Governing Council.

An energy shock is tolerable to the ECB so long as it remains just that, and in Santos Pereira's view, that has been the case until now.

Summary:

• ECB policymaker Alvaro Santos Pereira said energy-driven inflation in the euro area has not touched other prices
• He said the portion of goods and services with price increases above 3% or 4% has remained roughly steady for about two years
• Broadening inflation would leave central banks with no choice but to respond
• Gas prices would run into trouble in a winter like last year's
• He tied the recent rise in bond yields more to fiscal concerns

Euro area price rises caused by energy are not bleeding into the broader economy, ECB policymaker Alvaro Santos Pereira said, giving the central bank some comfort as it weighs the danger of accelerating prices.

Addressing the Bangkok Economic Festival, Portugal's central bank governor called it good news that inflation in Europe has yet to broaden. He referenced the proportion of goods and services whose prices are rising more than 3% or 4%, saying that metric had been broadly steady over the last two years or so.

Santos Pereira was also clear about the boundary. If inflation starts to broaden, he said, central banks will be forced to intervene. The implication is that the ECB will look past an energy shock for the time being, but would react if price gains extended into other areas.

He singled out natural gas as the principal danger. A repeat of last winter's conditions would cause difficulties for gas prices, he said, and the impact would flow straight into household and corporate energy bills. He noted as well that the latest climb in bond yields was linked more to budgetary worries than to the inflation outlook.

The gauge he mentioned is a breadth or diffusion measure that tracks how widely prices are advancing rather than how quickly the average is moving. It is drawing growing attention from central-bank officials. Bloomberg Economics drew attention to an analogous US metric this week, which indicated that fewer American consumer-price categories were running hot in September. Junko Koeda, a Bank of Japan board member, noted that more than 70% of the country's CPI components were still climbing from a year earlier, calling it evidence that inflation in Japan is taking hold.

For the ECB, the key indicators going forward are the new euro-area inflation numbers, the direction of gas prices as winter nears, and whether the share of quickly climbing prices begins to rise.