Category Archives: Inflation expectations

Expected inflation in the euro area

Inflation expectations matter for monetary policy. If people and firms expect high inflation to persist, people will demand higher wages and firms will raise prices, making it increasingly difficult to combat inflation. But how to measure expected inflation? I discuss expected inflation in the euro zone. The common message across different measures is that expected inflation has increased, and now exceeds ECB’s two percent target, but is not “way off”. The situation is fragile, and ECB cannot let the guard down.

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Is euro area monetary policy tight or loose?

Inflation in the euro area is sky high but monetary policy rates are negative. I have argued that ECB is behind the curve: Rates should have been raised months ago. But perhaps this critique is unfair. Perhaps monetary conditions have already tightened, as bond yields have risen in expectation of future hikes in monetary policy rates and reductions in QE. Whether monetary conditions stimulate inflation depends on real yields, though, i.e. nominal yields less inflation expectations. Using inflation-linked swap rates as proxies for expected inflation, a choice I discuss in my next blog post, euro area inflation expectations have risen faster than nominal yields in countries like Germany, meaning real yields have fallen. On the other hand, in countries like Italy, where spreads to German yields have widened, real yields have increased. Whether monetary conditions have tightened thus depends on the country in question. This makes it difficult for ECB to set the right policy rate for the euro area as a whole.

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