Isabel Schnabel: Disinflation and the Phillips curve

Speech by Ms Isabel Schnabel, Member of the Executive Board of the European Central Bank, at a conference organised by the European Central Bank and the Federal Reserve Bank of Cleveland's Center for Inflation Research on "Inflation: Drivers and Dynamics 2023", Frankfurt am Main, 31 August 2023.

Accompanying slides of the speech

After more than a year of significant monetary tightening, the outlook for the euro area remains highly uncertain. Activity has moderated visibly, and forward-looking indicators signal weakness ahead. But important pockets of resilience remain, especially the labour market.

Headline inflation has come down, mainly on the back of previous supply-side shocks unwinding. But underlying price pressures remain stubbornly high, with domestic factors now being the main drivers of inflation in the euro area. Therefore, a sufficiently restrictive monetary policy is critical for bringing inflation back to our 2% target in a timely manner.

I would like to start my remarks this morning by discussing the drivers behind the recent deterioration in the economic outlook. I will ask how quickly the slowdown in economic growth can be expected to lead to a decline in underlying price pressures and whether the euro area can still hope for a "soft landing". This largely depends on the slope of the Phillips curve – a topic that will be discussed extensively at the conference later today.

I will close my remarks by explaining why the current environment of high uncertainty warrants an approach to monetary policy that is data-dependent and robust, in the sense that it considers not only the most likely future path of inflation but the entire distribution of risks. Assessing the monetary policy stance meeting-by-meeting and adjusting it when necessary will ensure that it remains appropriate at all times.