Ignazio Visco: Monetary policy and the return of inflation, questions and charts

Speech by Mr Ignazio Visco, Governor of the Bank of Italy, at the Frankfurt School of Finance & Management, Frankfurt am Main, 1 March 2023.

Central bank speech  | 
01 March 2023
PDF full text
 |  15 pages

After at least three decades of moderate consumer price changes in advanced countries, inflation has returned to levels that are severely affecting the lives of all citizens (fig. 1). In this note, I will discuss five key issues that often take centre stage in the current macroeconomic debate. The first concerns the nature of the current inflation and its different sources in the two main advanced economies. The second is the claim that, in the euro area, monetary policy reacted too late to the acceleration in consumer prices. The third, closely related to this, focuses on whether or not the ECB made policy mistakes or forecasting errors and, if so, why these occurred. The fourth considers the supposed ineffectiveness of monetary policy and the channels through which it operates. The last issue tackles monetary policy prospects and asks whether, in the fight against inflation, the ECB should prefer to run the risk of doing too much rather than the risk of doing too little.

1. What is the nature of current inflation? What are the differences between the United States and the euro area?

Even though inflation is currently affecting many economies in an apparently similar manner, its underlying sources are different across countries, especially so if we compare the United States, where demand factors have been crucial in triggering the acceleration of prices, with the euro area, which has mostly been hit by a supply shock.