analysis
With recent inflation at seven percent, the ECB’s stability target of two percent still seems a long way off. When can consumers expect this?
“I will only be satisfied when we reach our goal, i.e. have inflation of two percent in the medium term,” said ECB boss Christine Lagarde recently in an interview with tagesschau.de. “We’re not there yet. But we’ll make it.”
The core task of the European Central Bank, to ensure price stability in the euro zone, seems to be very clearly outlined. But – how long is “medium term”? One looks in vain for a definition of this term, which is also quite flexible in economic theory, at the ECB.
“She didn’t do that on purpose,” she said Stefan Schneider, Chief Economist for Germany at Deutsche Bank. On the other hand, she named two guard rails to narrow down the term: On the one hand, the goal must be “verifiable”, i.e. remain within a manageable framework. On the other hand, however, the central bank must have a fair chance of achieving the goal with its range of instruments. Because it cannot do anything directly against external shocks such as an energy price explosion in the wake of the Ukraine war. The medium term is therefore generally set at around one and a half to two years, according to the Deutsche Bank economist.
price stability end of 2025?
So when could the two percent target be reached? If July 2022 is taken as a basis, when the monetary watchdogs – too late in the eyes of many critics – embarked on their steep interest rate hike course, the summer of 2024 would be the result. But the ECB itself, which is known for its rather optimistic inflation forecasts, recently assumed that price stability will only be realized “in the second half of 2025”. The central bank expects inflation in the euro zone to be 5.3 percent this year and 2.1 percent for 2025 as a whole.
The financial market experts surveyed by the Mannheim-based economic research institute ZEW also expect a significant drop in inflation. However, the ECB’s stability target will “probably only be achieved after 2025”. In particular, the 181 financial experts surveyed expect that rising wages will lead to further inflationary pressure. The green transformation of the economy is also generally regarded as a driver of inflation.
Strength disinflationary effects
All experts agree that the monetary watchdogs are benefiting from strong disinflationary effects. After the price shock on the energy markets, prices there have been falling for months, which is affecting consumer prices with a certain delay. The supply chains are also working better again, so that companies can once again meet demand at stable prices.
In addition to these supply-related factors, over which the ECB itself had no influence, the seven interest rate hikes by the monetary authorities are also starting to have an effect. The worsening financing conditions have already had a dampening effect on credit demand and money supply growth.
In particular, the development of energy prices makes Deutsche Bank economist Schneider much more confident. The ECB’s inflation target could already be reached in the summer of next year, even if core inflation excluding energy and food prices will continue to be significantly higher. However, the economist also points to considerable forecast uncertainties such as possible further shocks, demographic and fiscal policy influences and the effectiveness of interest rate increases.
When exactly the stubborn inflation will be caught again remains open. However, the message from the experts is that the goal of price stability can certainly be achieved within a reasonable time frame.