They Said It About Core Inflation - Recent Comments of ECB Governing Council Members
13 February 2023
FRANKFURT (Econostream) – The following is a compendium of comments made by European Central Bank Governing Council members related to the monetary policy relevance of core inflation. We include comments made since the December 15 Council meeting.
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Christine Lagarde (ECB)
02 February 2023
‘In view of the underlying inflation pressures, we intend to raise interest rates by another 50bp at our next monetary policy meeting in March and we will then evaluate the subsequent path of our monetary policy.’
‘…the recent fall in energy prices, if it persists, may slow inflation more rapidly than expected. This downward pressure in the energy component could then also translate into weaker dynamics for underlying inflation.’
‘I have to tell you that there was general agreement on the fact that the 50bp this time around and the 50bp in March were legitimate on the basis of, particularly in March, of the underlying inflation pressure that we know will continue.’
‘The underlying inflation pressure seems to be, whether you look at core, trimmed, supercore, in all sorts of dimensions, adding to which the measurement of the fiscal measures that have been put together, the wage negotiations and the wage direction that we are seeing, we have all scenarios available to decide that March actually warrants a 50bp increase.’
‘So, we have to look at energy costs, because it might transmit – and at which pace we don’t know and we will be observing that very carefully – into underlying inflation elements.’
‘When I look at core inflation, which is, by far, not the only component that we look at – we look at many more of those – but when I look at core inflation, we were at 5% in November, moved up to 5.2% in December, stayed at 5.2%, and this is the highest that core inflation has been in our part of the world. So it’s true that headline inflation has gone down, and more so than we had expected, and that many had expected. But underlying inflation pressure is there, alive and kicking, which is why we are committing as we are – intending as we intend – in this monetary policy statement, and this is why I say that we have more ground to cover and we are not done.’
‘…we need to move into restrictive territory, into restrictive levels. We know that rates are the best tool in order to do so, so we will use interest rate hikes in order to get to those levels. As I said, we are certainly not there now, nor will we be in March, given that we will rely on underlying inflation indicators and pressure that we see very, very clearly nowadays.’
‘…we intend – which is strong, as I said earlier on – to do 50bp, based on the underlying inflation pressures that we see, anticipate, and that are not going to go away. … Inflation is still far too high today, in particular when we look at underlying inflation components.’
‘Headline is going down, which I think is going to be important, and in particular for the wage negotiations that will be coming up, but we still have underlying inflation factors that are strong, solid, and are not budging.’
‘But while energy inflation has recently been coming down, underlying inflation continues to rise. As a result, it is vital that inflation rates above the ECB’s 2% target do not become entrenched in the economy.’
‘Food price inflation and underlying price pressures across the economy have strengthened and will persist for some time.’
‘It may well be that the December number of HICP, and possibly core inflation, be a little bit lower. But we have good reasons to believe that January and February, for instance, are likely to be higher. So we cannot be fixated on one single number. … To just give you a little bit more substance: typically, January and February are months where some of the passthrough, particularly energy prices, will reach the retail level. There are countries where the wholesale high prices have not yet travelled through the retail, and where people have not yet seen the high level prices, for energy in particular, so we are very mindful of that. The other component which we see also rising in the next few months is food. So food and energy will continue to, unfortunately rise, which explains why we have this revision of projections.’
Isabel Schnabel (ECB)
10 February 2023
‘We’ll keep rates high until we see robust evidence that underlying inflation returns to our target in a timely and durable manner.’
‘Nevertheless, one cannot give the all-clear, because what ultimately particularly concerns us is that underlying inflation ... is still at an extraordinarily high level, and these are inflation measures that have a much higher persistence, and therefore they are particularly decisive for the development of inflation in the medium term, and therefore these are figures that we look at very closely.’
‘The second question we have to ask ourselves is how long do we have to stay at this restrictive level? And that ultimately depends on whether we have robust evidence that inflation and especially underlying inflation will move back to ... our target of 2% and then stabilises there. Important indicators for this are core inflation, wage growth, inflation expectations play a very important role, and of course energy prices and supply chain disruptions, because it cannot be ruled out that something might happen in this area.’
‘What started as a relative price shock has gradually morphed into a broad-based increase in the general price level. Preliminary inflation data for December point to a persistent build-up of underlying price pressures even as energy price inflation has started to subside from uncomfortably high levels.’
Philip Lane (ECB)
6 January 2023
Persistent energy price weakness should lead to ‘less pressure on food inflation, less pressure on core inflation. We should recognize that but, of course, we also should recognize the uncertainty about the future path of energy prices.’
Luis de Guindos (ECB)
08 February 2023
‘At 5.2%, core inflation, which excludes energy and food prices, is at its highest level in the history of the monetary union. That is not good.’
Fabio Panetta (ECB)
24 January 2023
‘…some positive signs on the inflation front are emerging. For example, the seasonally adjusted three-month inflation rates (which capture the latest dynamics of inflation) have decreased in recent months as regards not only headline but also core inflation.’
‘…the recent improved economic data will support core price pressures.’
Joachim Nagel (Bundesbank)
08 February 2023
‘The core rate is an important monetary policy indicator. It reflects price developments excluding the volatile energy and food prices and helps us to better assess the future path of consumer prices. And the core rate is currently showing that inflation is increasingly eating its way through the economy and gaining in breadth. We cannot be pleased with that. We must not let up now, even though energy has recently become cheaper.’
‘Core inflation – the rate that strips out the more volatile energy and food prices – is a better indicator of the price trend. And that core rate has been rising more or less steadily since last summer, climbing to 5.2% in the euro area and 5.4% in Germany in December. That's also why I see no reason to change any aspect of the path mapped out by ECB President Christine Lagarde.’
‘…inflation, just like core inflation, is still very high.’
‘Energy prices skyrocketed and over time price pressures have spread across the economy. Just take the core rate of inflation, that means the increase in prices excluding energy and food. In December, it rose to 5.2% year-on-year in the euro area. That’s far too high.’
François Villeroy de Galhau (Banque de France)
‘[W]e have seen encouraging signs [on inflation] in the last two months in France and the euro area with a stabilization or even a downward trend. We should reach the peak of headline inflation and probably underlying inflation in the first half of 2023, but this will only be a step, and certainly not the end of the fight against inflation.’
‘We have had encouraging signs on French and euro area inflation in the last months that it is beginning to stabilise and even a downwards trend […] though we have not seen this yet in core inflation.’
‘This will be the real sign [that inflationary pressures are beginning to subside].’
‘We should see the peak in headline and probably core inflation in the course of the first half of 2023. It will be a step, but it will not be the end of the fight against inflation.’
‘Unfortunately, inflation has spread to all goods and services: core inflation - excluding energy and food - which we estimate at around 4.2% in December, is also well above the 2% target, and it is not falling. It is on this "general" inflation that monetary policy is relevant, and we have a responsibility not to let it take hold.’
‘We need to remain pragmatic and to be guided by observed data, including on core inflation, without getting fixated on overly mechanical rate hikes.’
‘Faced with this broad “underlying” inflation (excluding energy), monetary policy is necessary and effective.’
Ignazio Visco (Banca d’Italia)
11 February 2023
‘It is true that inflation is still currently above our target, and especially so if we look at various measures of core or underlying inflation, and I do understand that it would come at a cost for the economy if this led to the need for a stronger and more prolonged restriction of monetary policy.’
‘If the current reduction in headline inflation, reflecting the return of gas prices in Europe to more moderate levels, is followed by a similar, although lagged tendency in underlying inflation, the supply shock will have proved to have been temporary, albeit longer lasting than expected, also as a further negative result of the dramatic events in Ukraine. But this is obviously too early to say.’
‘[T]he core component of inflation has progressively strengthened, to 5.2% [in December], also reflecting the usual lag in the transmission of energy cost dynamics to final prices of goods and services.’
‘We have seen how the rise in energy prices has ended up being reflected in a gradual increase, still in progress, in core inflation, i.e. net of the more volatile components such as energy products and foodstuffs, which are also affected by the conflict. It is to be expected that if the cost of energy does not rise appreciably, core inflation will also fall over a not too long period, reflecting its recent sharp decline. But expectations need to remain firmly anchored.’
Pablo Hernández de Cos (Banco de España)
‘Overall, about 75% of the increase in euro area inflation in 2022 is estimated to have been caused by the direct and indirect effects of energy and food prices. But the pass-through of supply shocks and depreciation would have been faster than in past episodes, leading to a broad-based build-up of inflationary pressures. Thus, core inflation (excluding energy and food) reached 5.2 % last December, an all-time high.’
‘[C]ore inflation stood at 5.2 % [in December], a record high and two tenths of a percentage point higher than in November.’
Klaas Knot (De Nederlandsche Bank)
08 February 2023
‘Relative to our current projections, the sharp decrease in energy prices could over time transmit to core inflation via lower prices for goods and services and bring headline inflation down faster.’
‘...measures of underlying inflation, that serve as an indicator of inflationary pressures in the policy-relevant medium term, still stand at high levels, and show few signs of abating yet. Along with the turn in headline, the focus of the Governing Council has also now shifted from energy and headline to breaking the underlying inflation dynamics. Indeed, inflation has broadened over the course of last year. Costlier energy inputs and higher wage demands have translated in increasing underlying inflation, as for example measured by core inflation. Today, core inflation – HICP excluding energy, food, alcohol and tobacco – stands at 5.2% and is expected to stay around this very high level for a few more months before levelling off. I would expect inflation in core goods to start falling first because price pressures from energy, supply chain disruptions and a weak euro are fading, but core services inflation could prove more persistent. Going forward, the key question for me thus is how persistent core inflation will turn out to be. When we look at the month-on-month dynamics of core inflation in the euro area, we see that our current situation is different than the one in the United States. Over there, core inflation is clearly on a decreasing path, which started sometime last summer. In the euro area, we do see the 3-months dynamics slowing down, but the 6 and 12 months dynamics are still increasing, which suggests that it will take some time before core inflation will slow down. The largest upward risk to core inflation is a further increase in wage growth. While inflation expectations on the whole have remained quite well-anchored, labour unions have (understandably so) been pushing for higher wage growth to make up for the loss in purchasing power. So far, negotiated wage growth has remained quite modest with 2.9% y-o-y for the euro area (in November), but this number is projected to increase.’
‘...the longer core inflation stays high, the more plausible it becomes that employees will base their wage demand on past inflation and will attempt to get full compensation for their loss in purchasing power.’
‘Once we see a clear and decisive turn in underlying inflation dynamics, I therefore expect us to move to smaller steps. But absent such a turn, the ECB will continue to stay the course on its steady pace upwards, in pursuit of price stability for all euro area citizens.’
‘We focus on core inflation where, unfortunately, there is no good news. Because it is still on the rise. Underlying inflationary pressures show no signs of abating yet.’
‘Core inflation has not yet turned the corner in the euro area.’
‘Core inflation shows no signs of abating. I would first need to see different dynamics in core inflation before I could start thinking about a more equal balance of risk.’
Pierre Wunsch (Belgian National Bank)
03 February 2023
‘If core remains persistent, if we keep seeing core momentum being close to 5%, for me a terminal rate of 3.5% would be a minimum. But I don't want to give any number that is not conditional on incoming data.’
‘Rates are clearly above 4% in the UK and the U.S.; that would also be a reference for me. Why would we stay at 3% if we have more or less similar core numbers? I'm not saying we need to go to 4% ... but if incoming data continue to show very persistent core, we will have to look at what the U.S. and UK seem to consider as a restrictive enough interest rates to bring inflation back to 2%.’
Mārtiņš Kazāks (Latvijas Banka)
09 February 2023
‘We’ve seen energy prices coming down and this is likely to pull headline inflation down significantly, though the other measures will be much stickier. This does not mean that we should stop tightening monetary policy. I would take a very close look at underlying inflation measures, wage pressures, inflation expectations and the economy overall.’
One element of a situation in which further monetary tightening could lose its appeal for Kazāks was a ‘clear turnaround’ of core inflation.
‘It is possible for core inflation to continue trending up even as headline inflation is coming down, for instance, due to swings in energy prices. In my view, core inflation currently is a key gauge for inflation persistence and policy decisions.’
Olli Rehn (Bank of Finland)
03 February 2023
‘Core inflation, i.e. inflation without food and energy – to which a lot of attention is paid in monetary policy decision-making – on the other hand, remained remarkably high in January, i.e. at the level of 5.2%.’
Madis Müller (Eesti Pank)
03 February 2023
‘Speaking of rapid price increases, there are signs of concern that the more permanent part of the price increase, i.e. core inflation, shows no signs of abating. The more permanent pressure to increase prices can be analysed not only by looking at the aggregate inflation number, but by excluding the price changes of energy, food and other products and services with particularly fluctuating prices. The core inflation indicator has remained stable above 5% in the euro area for the last four months and did not decrease in January either.’
Boštjan Vasle (Banka Slovenije)
03 February 2023
‘Core inflation, which excludes food and energy prices, remained unchanged at 5.2% in January, further indicating the persistence of broader-based inflationary pressures. In particular, food price inflation and wage developments, which have accelerated in recent months, are important sources of uncertainty about the path of inflation going forward.’
Yannis Stournaras (Bank of Greece)
30 December 2022
‘In the medium term, the risks regarding the inflation outlook are intertwined with the possibilities of … further increases in energy and food prices [and] strengthening the extent to which increases in energy and food prices are passed on to final consumers.’
Peter Kažimír (National Bank of Slovakia)
03 February 2023
‘I fear that core inflation may stubbornly remain at too high levels, and that is unacceptable. The moment people and businesses get used to high inflation and it translates into expectations, we have a fundamental problem.’
‘What's currently the most authoritative from my point of view is the core-inflation trend. Its development confirms the need to continue on the path taken.’
Gediminas Šimkus (Bank of Lithuania)
03 February 2023
‘Those more stable inflation factors are well above the medium-term inflation target … With core inflation, I don't think we have passed the peak yet.’
‘Core inflation remains strong and demonstrates that the fight against inflation is not over.’
‘Pressures in wage growth are increasing — I expect wage increases to exceed historical averages in the euro area. It's something that's happening and something we need to take into account because it affects core inflation.’
Robert Holzmann (Austrian National Bank)
03 February 2023
‘We expect inflation to come down in the course of the year, the markets even expect a very strong reduction in inflation. That means that at the end of the year we will already - that is, in December - have a much lower inflation rate to look forward to. But what we don't know at the moment is how the prices for services and industrial goods and other goods, which are still driven by oil prices of the past, will develop, i.e. those that do not depend only on energy or food, variable products. And at the moment this core inflation rate ... is still unchanged, that is, it has not gone down, it has continued to go up. And as long as these drivers are not reduced, it is very difficult to assume that inflation will fall.’
Must watch core inflation ‘very closely’.
‘As long as core inflation has not peaked, the change in headline inflation will not change our determination.’
Boris Vujčić (Croatian National Bank)
10 February 2023
‘We need to look at both numbers [core and headline inflation]. Monetary policy is clearly better suited to deal with core inflation as core inflation is mostly driven by demand side shocks. Core inflation provides a clearer picture of the underlying inflation pressures and thus could serve as a guide to where headline inflation itself is heading, provided that the economy is not hit by multiple shocks that can blur the relationship between core and headline inflation. In addition, when headline inflation has an important transitory component, a focus on core measures can help avoid monetary policy mistakes. However, headline and core are not independent of each other, and stable headline inflation is the ultimate goal of monetary policy as households care about the prices of all the items they buy.’
‘We need to see a sustained decline in core inflation [to be confident that policy is working and going in the right direction]. Core inflation is still clearly too high.’
‘In general, that "last mile" could be difficult if developments of headline inflation are dominantly driven by core inflation which is usually sluggish, especially in the environment of rising wage pressures. In this case monetary policy has to be restrictive enough to push the core inflation downwards, which is not an easy task as it could imply relatively high sacrifice ratio. On the other hand, there is a possibility that headline inflation will fall to 2% much sooner than expected due to various factors that operate from the supply side that could quickly feed into non-core related components and bring the headline figure down sharply, below core inflation.’
‘So, the first leg of inflation fuelling wages is obvious. But the second leg, where wage hikes then fuel back into the inflation, has probably only had limited impact on inflation so far, and we still need to see the extent of that pass-through in the coming period, and the risk it presents to the persistence of the core.’