Could the inflation target be raised to 4%?
Inflation in the euro zone will rise to a very high level (close to 10%?), bringing it down to 2% would be extremely costly in terms of activity and employment. The question then arises: could the inflation target be raised to 4% in the euro zone? The difficulty is as follows: if inflation is 4%, all incomes (wages, pensions, welfare transfer payments) must be perfectly indexed to prices to avoid chronic losses of purchasing power. Inflationary shocks will then have very powerful effects on inflation, which means that the volatility of inflation will increase sharply. If there were no inflationary shocks, there would be no problem in having inflation at 4% with perfect indexation of all incomes. But inflationary shocks make this choice dangerous, given the volatility of inflation they would give rise to. Perhaps we can then simply increase the inflation target for the inflation generated by the energy transition, so that the ECB avoids penalising investment (including investment in the transition) by reacting to this particular inflation.