Persistent underestimates of inflation and questions market understanding

Two interesting themes in the ECB Accounts. First, ECB Governing Council members acknowledged that inflation forecasts are likely to be revised up in December and that there has been a series of inflation underestimations recently and persistent increases to forecasts. Second, the ECB questions whether the market had really understood the ECB's forward guidance.

• "Members widely agreed on the expected hump-shaped pattern in the shorter-term inflation outlook. Confidence was expressed that the effects of higher energy prices and of supply bottlenecks would be temporary, although the decline in inflation in 2022 would now take longer than previously expected. Reference was made to the recurrent underestimation of the latest outcomes for both headline and underlying inflation, corroborating earlier conjectures that the risks around the September 2021 ECB staff projections had been tilted to the upside. Against this background, it was seen as likely that in the December 2021 Eurosystem staff projections the shorter-term inflation outlook for the euro area would once again be revised upwards."
• "Current market pricing may have also reflected, in part, an incomplete understanding of the three conditions laid out in the Governing Council's forward guidance that had to be satisfied before lifting the policy rates, especially in view of the ECB staff's assessment that inflation would decline over the course of next year and that inflation was foreseen to settle below the target over the projection horizon."
• Very little market reaction to the release of the Accounts.