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  • Karl Pichelmann

Inflation expectations reconsidered: just stay calm?

The conversation was overshadowed by the events unfolding in the Ukraine being attacked by Russian military forces. While it is probably too early to assess the full economic impact of Putin`s war and the ensuing sanctions regime imposed by the international community, a short-run effect on oil and other raw material prices is already discernible and stock market volatility increased as well. Much will depend on in what form the military conflict will eventually settle, but in general, as one participant noted, "there ain't no peace dividend no more, but rather the cost of cold war."


Turning to the initial topic of the conversation, the lead speaker reviewed the current inflation developments in the US and the EU and its main drivers. According to her analysis, more than half of the pick-up in inflation rates over the past year can be attributed to rising energy prices. Hopes for an energy price stabilisation at current higher levels are now seriously dented by Russia´s aggression. Core inflation has also picked up in recent months, although second-round effects from wages are for the time being still largely absent. After reaching a record rate of 4.6% in the fourth quarter of last year, inflation in the euro area was projected in the Commission's winter forecast to peak at 4.8% in the first quarter of 2022 and remain above 3% until the third quarter of the year. In the lead speaker`s view, the projected decline of inflation to 2.1% in the final quarter of the year, before moving below the European Central Bank's 2% target throughout 2023, must now be regarded as overly optimistic.

The conversation then turned to the appropriate stance of monetary policy by the ECB given current circumstances. Participants broadly agreed that a "steady hand" has become even more necessary given the heightened uncertainties. Inflation expectations as measured by the 5y-5y forward swap rate have remained broadly anchored so far; and clear communication by the ECB was seen as essential to stabilise inflation expectations. Views were mixed on the time profile of raising the policy rates, with some participants arguing for "better sooner than later", while others pleaded to maintain a "wait and see approach" while not excluding a rate rise at a later stage.

Finally, the conversation touched upon factors influencing inflation developments in a medium-to-longer term perspective. For example, one participant argued that the green transition will drive a wedge between producer prices and consumer prices which could lead to inflationary distributional pressures. It was also noted that the demographic effect may revert soon and contribute to upward price drivers. Last but not least, the inflation-dampening impact from setting up global value chains is likely to peter out and could revert as well. In a nutshell, there was broad agreement that the very low inflation rates of recent years will most likely not come back in the medium-term future.


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EU institutions and policy settings have been prone to populist attack from both the purely economic and the more cultural ‘nativist identity’ angle. Current competences, mostly confined to organising