Thursday, March 23, 2023

After wrong assessments: The ECB wants to change its inflation forecasts

Dhe inflation in the euro area reached 9.1 percent in August, the highest level since the founding of the European Monetary Union. The European statistical office Eurostat confirmed a corresponding first estimate on Friday. Estonia now has the highest rate of inflation among all euro countries at 25.2 percent. At 8.8 percent, according to the European calculation method, Germany was one of the five countries with the lowest inflation in the euro area – in the month the fuel discount and 9-euro ticket still pushed inflation down.

After Wrong Assessments: The Ecb Wants To Change Its Inflation Forecasts

The high increase in the inflation rate is in striking contradiction to the inflation forecasts of the European Central Bank (ECB) from the past two years. They were used to justify the restraint in monetary policy for a long time. The ECB had expected that the increase in inflation would not be as high and would only be temporary. ECB President Christine Lagarde announced in March last year that although the ECB was expecting average inflation of 1.5 percent for 2021, this would fall again in 2022 to 1.2 percent. Gradually, this forecast had to be adjusted to reality again and again.

“At the September meeting of the ECB Council, the inflation forecasts of the ECB analysts were revised upwards more than ever before,” stresses economist Frederik Ducrozet from Bank Pictet. And Michael Holstein, chief economist at DZ Bank, believes that even this forecast from last week of 8.1 percent was already outdated on the day of publication – and must be adjusted upwards again.

What’s going on there? One can now argue that the ECB could not have foreseen the Ukraine war with its dramatic consequences for price developments. Apparently, however, the central bank had also significantly underestimated the effects of the supply bottlenecks and energy turbulence after the corona phase for a long time. “Inflation rates are indeed higher than expected and will last longer than originally thought,” ECB chief economist Philip Lane said in February. Inflation had already reached 5.9 percent.

Models were ‘not very good’

Now it is difficult to check whether the inflation rates would have fallen again long ago if the Ukraine war had not happened. But the huge gap between forecast and reality has not only led to a discussion among economists as to whether the ECB should somehow bring its forecast closer to reality. The central bank itself is also talking about the incorrect forecasts and thinking about improvements. “We can no longer just rely on the predictions of our models,” said ECB President Christine Lagarde in a recent interview. And ECB Executive Board member Isabel Schnabel admitted: “We saw that our models were not particularly good at predicting future inflation developments.”

Nation World News Desk
Nation World News Desk
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