UPDATE: ECB Praet Notes Disconnect Between Growth And Inflat'n

--Includes Quote In Penultimate Paragraph

By Christian Vits

     FRANKFURT (MNI) - The euro area is still not showing signs of higher

inflationary pressures despite the robust economic recovery, European Central

Bank Chief Economist Peter Praet said Thursday.

     There appears to be "a disconnect between growth and inflation," Praet said

in Brussels. 

     "As slack in the economy continues to be absorbed, reflationary forces will

gradually build up and the traditional Phillips curve relationship between

inflation and the business cycle should eventually reassert itself," he said.

     However, current estimates of the slope of the Phillips curve "still appear

to be flatter than in previous times, which could be interpreted as an

indication that the relationship between economic slack and inflation has

weakened," Praet added. 

     "A mismeasurement of slack (because of structural changes in the labour

market) or an unstable relationship between slack and inflation over time could

be among the reasons," Praet continued.

     With a view to the economic recovery, Praet said that real GDP growth is

projected to remain above potential growth in the coming years. 

     Against the backdrop of the "substantial" easing of financing conditions,

domestic demand has become the mainstay of growth in the euro area, making the

recovery more resilient to developments overseas, he noted.

     Praet said the strength and resilience of the recovery tends to "foster our

confidence that reflationary forces will gradually support a return of headline

inflation towards a level that is below, but close to, 2% over the medium term."

     "But inflation dynamics continue to be subdued," he added.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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