Christine Lagarde: Breaking the persistence of inflation

Speech by Ms Christine Lagarde, President of the European Central Bank, at the European Central Bank Forum on Central Banking 2023 "Macroeconomic stabilisation in a volatile inflation environment", Sintra, 27 June 2023. 

Central bank speech  | 
28 June 2023

Inflation in the euro area is too high and is set to remain so for too long. But the nature of the inflation challenge in the euro area is changing.

We are seeing a decline in the inflation rate as the shocks that originally drove up inflation wane and our monetary policy actions are transmitted to the economy. But the pass-through of those shocks is still ongoing, making the decline in inflation slower and the inflation process more persistent.

This persistence is caused by the fact that inflation is working its way through the economy in phases, as different economic agents try to pass the costs on to each other. And while it has been anticipated for some time in our staff projections, we have revised our assessment as new data have come in.

Monetary policymakers need to address this dynamic decisively to ensure that it does not lead to a self-fulfilling spiral fed by a de-anchoring of inflation expectations.

So, the key question we face today is: how can we break this persistence?

In the ECB's Governing Council, we have been clear that two elements of our policy stance will be key: we will have to bring rates to "sufficiently restrictive" levels and keep them there "for as long as necessary".

Both elements are affected by uncertainty about the persistence of inflation and about the strength of the transmission of monetary policy to inflation.