Report
A return to anchoring of inflation expectations or significant rise in unemployment in the euro zone?
The ECB seems determined to bring inflation down to 2% by the end of 2025. We can imagine two mechanisms that would significantly reduce inflation: A return to anchoring of inflation expectations at 2%, whereas these expectations currently exceed 2.7%; a return to credibility for the ECB, allowing inflation to fall at no cost to the economy; A significant rise in unemployment, if inflation expectations do not fall, which would cause wages to slow and inflation to fall. How can we achieve disinflation by lowering expected inflation at a low cost in terms of growth? Can the ECB’s strategy (keeping interest rates at 4.5%, i.e. below inflation excluding energy and unprocessed food , for a long period of time) be effective in bringing down expected inflation?
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