(Finance) – After the pandemic, “Inflation forecast errors increased measurably and remained persistent. This is not because central banks were particularly bad at predicting inflation. After all, both professional forecasters and international institutions have made significant forecast errors.” Isabel Schnabelwho is part of the Executive Board of the ECB, during an event at the European University Institute in Florence.
“Rather, this is because the magnitude of shocks hitting our economies has increased markedly, and some of them have resulted in fundamental structural changes to the economy, making forecasting inflation an extremely difficult undertaking – added – These forecast errors, in turn, have probably contributed to the delayed reaction of central banks to the surge in inflation“.
According to Schnabel, central banks are currently trying to draw the right lessons from recent experience. “Perhaps most importantly, the post-pandemic inflation surge has validated, rather than disproved, the inflation targeting framework. While inflation often reaches double-digit levels, long-term inflation expectations have remained essentially anchored around 2% in advanced economies”.
“This is a strong vote of confidence in the determination and ability of the central bank to restore price stability – he explained – By keeping inflation expectations anchored, central banks have managed to significantly reduce the persistence of inflationthus helping to avoid the production losses that were necessary in the 1980s to bring inflation down from high levels.”
According to the ECB representative, “the return to the pre-pandemic policy framework, which was heavily based on the adjustment and communication of policy by central banks around a central inflation forecast, could involve risks. This framework may therefore require a deeper rethink, even if inflation is approaching levels consistent with price stability.”
“As part of this rethink, central banks will need to carefully consider the role that central forecasts should play in a context characterized by greater macroeconomic volatility and persistent supply-side shocksand how projections could be made more robust to enable decision-making on a more solid basis, while enabling clear and transparent communication about inherent uncertainty,” he added.