FRANKFURT, Germany — The European Central Bank’s president has highlighted that inflation has become more unpredictable due to global events, such as the COVID-19 pandemic and Russia’s invasion of Ukraine. These developments require policymakers to incorporate the potential impact of such extreme scenarios in their strategies and communicate these risks to the public.
In her speech at the central bank’s annual conference in Sintra, Portugal, ECB President Christine Lagarde remarked on the increasing volatility of inflation. She attributed this to frequent supply disruptions forcing companies to adjust their prices more regularly. This trend signals a fundamental change in company operations under continuous high uncertainty, according to Lagarde.
The bank, therefore, needs to account for extreme scenarios in its economic assessments alongside more probable predictions, sharing these potential outcomes with the public. Lagarde referenced the significant inflation rise post-Russia’s invasion of Ukraine, where a baseline scenario suggested a 5.5% inflation for 2022, but a worst-case outlook approached the eventual inflation rate of 8%.
The COVID-19 pandemic serves as another illustration: consumer spending shifted dramatically from services like dining out to goods such as home fitness equipment. Lagarde suggested that scenario analysis could have presented a broader range of potential inflation outcomes, reducing the chances of conveying misleading certainty to the public.
On Monday, the bank’s strategy review reiterated its 2% inflation target, which it currently meets with an annual price increase of 1.9% in May. This decline has enabled the bank to lower its benchmark interest rate from a high of 4% to 2%.
Adding further complexity to the economic outlook is the threat of increased tariffs from U.S. President Donald Trump, contributing to growth and inflation uncertainties. As the European Commission and U.S. negotiators hurry to finalize a trade deal by the July 9 deadline, these tensions loom large.
The Sintra conference, much like the Federal Reserve’s event in Jackson Hole, Wyoming, convenes prominent central bankers and economists from around the globe. Notably, Fed Chair Jerome Powell will participate in a panel on Tuesday with Lagarde, Bank of England Governor Andrew Bailey, Bank of Korea Governor Chang Yong Rhee, and Kazuo Ueda, the Bank of Japan’s governor.