ECB’s Lane: Would Be a Major Failure by Us if Households Expected Inflation to Remain High

17 November 2022

By David Barwick – FRANKFURT (Econostream) – The European Central Bank will have failed in a big way if consumers saw inflation staying as elevated as it is now, ECB Chief Economist Philip Lane said Thursday.

In an IMF podcast, Lane described as ‘fundamental’ ensuring that everyone believes in a timely restoration of price stability. ‘So in the near term, inflation can be high - as it is - but what would be really a major failure by us would be if households believed that inflation would remain at these levels’, he said.

That is why the ECB has acted, he said, and has stated that ‘we expect more to do.’ The central bank is ‘proving by our actions that we will make sure that monetary policy delivers our 2% target in a timely manner’, he said. ‘And I think we will be closely monitoring the expectations data in order to really assess - is that message loud and clear.’

Although US and euro area inflation differ, ‘[t]he commonality is no matter where the inflation comes from, if inflation is high, there's a risk of what we call second-round effects’, he said.

To a degree, he said, it is correct for workers to seek to compensate for higher prices. ‘But we have to make sure that that does not become a self-sustaining persistent momentum’, he said.

As to the eventual subsiding of inflation, ‘[a] lot of this will be the fading out of the supply shock’, he said. ‘But then we have to make sure the job is completed with monetary policy.’

That said, current euro area inflation ‘has a big energy component, has a big supply component’, he said. ‘This is why we do think inflation will fall back next year, and our focus is on making sure in a timely manner, it doesn't just fall back to a more moderate number, it falls back all the way to our target of 2%.’

According to Lane, across a wide range of indicators the ECB uses, ‘there's a very good appreciation that a lot of the inflation we see is not expected to persist.’

‘Now what is true is we do want to see the consumer expectation turn around’, he said, observing that three-year ahead expectations rose early this year and, unlike in the US, has not yet started to reverse.

‘So we definitely look at this, but let me emphasize, we have to integrate the signals about expectations from a wide range of sources’, he said. ‘It's not about any individual survey that we look at.’