![]() Looking forward, the broad-based nature of recent upward surprises, extending well beyond the energy component, implies that significant uncertainty remains as to when the inflation peak will eventually be reached. For core inflation, the difference would have been twice as much – that is, core inflation would have been 2% rather than 1.4%, which is the largest difference observed since the start of the sample in 2012 (Slide 4, right-hand chart). If owner-occupied housing were included in the HICP, headline inflation in the third quarter of 2021 would have been 0.3 percentage points higher. In the third quarter of 2021, prices for houses and flats in the euro area increased by 9% year-on-year, an unprecedented rate of increase (Slide 4, left-hand chart). Residential real estate prices continued to increase at an alarming pace. ![]() Less than a year ago, this share was close to 20%.Ĭurrent measured inflation would be even higher if the costs of owner-occupied housing were included. The prices of around two-thirds of the goods and services included in the HICP are currently increasing at an annual rate above 2% (Slide 3, right-hand chart). Measures of underlying inflation are following an unprecedented upward trend (Slide 3, left-hand chart). Today, inflation is not only higher than expected, but price pressures are also visibly broadening. In January, euro area inflation surprised to the upside for the seventh consecutive month. Headline inflation as measured by the Harmonised Index of Consumer Prices (HICP) continued to increase both in December 2021 and in January 2022, when it reached a new historical high of 5.1% (Slide 2). These expectations have been disappointed. There was a strong conviction that the combination of statistical base effects, slowing energy price inflation and the removal of one-off tax effects would mark a turning point in the euro area’s inflation trajectory towards the end of last year. ![]() A qualitative and quantitative change in the euro area’s inflation outlookĪ year ago, there was a widely shared expectation that inflation would rise sharply in response to the reopening of our economies but would subside swiftly as the extraordinary factors related to the pandemic would fade. And the third point provides thoughts on how our sequence may interact with conditions in sovereign bond markets and the risks of fragmentation. ![]() The second point relates to how the monetary policy transmission mechanism in the euro area affects the choice of policy instruments at different stages of the normalisation process. The first regards the question as to how the inflation outlook affects the policy normalisation process. I will then explain the sequencing of policy measures that we will take once the Governing Council judges that policy should be normalised and will elaborate in more detail on three aspects that are more specific to the euro area. In the following, I will first discuss the current outlook for inflation. And the clear sequence with which we intend to remove monetary stimulus, if and when necessary, reduces the uncertainty about how our actions will affect financing conditions and the broader economy. Our forward guidance has explicitly defined the conditions that need to be met for policy rates to be raised. Our policy framework enables us to deliver on these expectations. Households and firms count on the ECB to protect their purchasing power without putting at risk the current strong recovery from the crisis. In this environment, monetary policy needs to ensure that the forces pushing up prices today will not jeopardise price stability over the medium term. At the same time, prospects are rising that the fast spread of the Omicron variant may herald a turning point in the coronavirus (COVID-19) pandemic. In the euro area, inflation has proven more persistent and more broad-based than expected, labour market slack is being reabsorbed at a faster pace than anticipated and pipeline pressures continue to build up. My remarks today reflect the macroeconomic situation predating the war. Therefore, we are monitoring the situation closely. In such times of extreme uncertainty, central banks need to be a source of confidence and a reliable anchor for the economy. Our thoughts are with the Ukrainian people. This is a sad day for Europe and the world. The terrible act of aggression and the shock of war that we are witnessing in the heart of Europe overshadow today’s conference. Speech by Isabel Schnabel, Member of the Executive Board of the ECB, at a virtual policy panel on “Unwinding QE” at the first annual Bank of England Agenda for Research (BEAR) conference
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