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Key parts of the ECB Accounts (1/2)

ECB
  • ECB members clearly are dubious about the Staff inflation forecasts: "In particular, doubts were expressed about the convergence of inflation to 1.9% as expected in the baseline staff projection for 2024, the last year of the projection horizon. The question was raised as to how one could expect such a fast mean reversion in inflation, faster than in the previous projection round, after the current huge shocks to inflation. It appeared puzzling that inflation projections would still fall somewhat short of the 2% target in 2024 despite consecutive upside surprises in inflation outcomes, a persistently positive output gap for most of the projection horizon and the latest increases in longer-term inflation expectations. In this context, it was acknowledged that models estimated on historical data naturally had their limits in the face of unusual shocks and possible turning points or regime shifts."
  • There also appear doubts about the second-round effects in the staff forecasts: "Concerns were expressed that second-round effects might well be of a non-linear nature, taking some time to emerge but then becoming very strong and difficult to stop. Labour market dynamics and indications of increasing labour market tightness were seen to point clearly to rising wage pressures in the period ahead. It was argued that in the past the impact of energy price increases had been short-lived and had therefore been more naturally absorbed by wages or profit margins. This time the situation appeared to be different, however, given the large energy shock in conjunction with far-reaching structural changes, post-pandemic pent-up demand and supply shortages. This called into question the seemingly very muted reaction of wages to inflation in the staff projections.
    At the same time, it was recalled that in the staff projections second-round effects had been assumed to play out in line with historical regularities."
  • Market-based inflation expectations about 2% are generally dismissed..."It was pointed out that some market-based measures were significantly above 2%. On the one hand, it was suggested that this could be seen as the first sign that long-term inflation expectations were becoming unanchored and needed to be closely monitored, as this could give rise to a wage-price spiral. On the other hand, it was recalled that these measures included risk premia and that correcting for these would still leave genuinely expected inflation at around 2%."
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