Is the Euro zone's core inflation focus misguided? Persistent concerns are swirling as Euro zone prices rose more than expected last month and underlying price pressures accelerated, an unwelcome trend that is still not expected to prevent another. This raises serious questions about the effectiveness of current monetary policy and the ECB's analytical framework.
Several factors suggest the ECB's emphasis on core inflation might be leading them down the wrong path. One key issue highlighted is the ECB's own forecasting track record. Figure 1 shows that since 2025, when the ECB started to publish its core inflation forecasts, these forecasts turned out to be systematically biased. Between 20, ECB staff. This casts doubt on the reliability of core inflation as a leading indicator.
Furthermore, recent analysis points to supply-side shocks as a major driver of inflation, particularly in the wake of the pandemic. Our findings indicate that core inflation in the euro area was largely driven by supply-side shocks during the post-pandemic recovery. We show that global supply chain shocks, gas price volatility, and other external factors have significantly impacted price levels. Focusing solely on core inflation, which attempts to strip out these volatile components, may be masking the true underlying inflationary pressures and leading to inappropriate policy responses.
The latest figures paint a mixed picture. According to preliminary figures released by Eurostat on Friday, consumer prices rose 2.2% year-on-year, unchanged from March but slightly above the 2.1% forecast by. This persistent inflation, coupled with the potential misinterpretation of core inflation data, presents a significant challenge.
A more robust approach might involve considering alternative measures of inflation that better capture long-term trends and demand-driven pressures. Our new core inflation measure, the structural core inflation rate, bears the interpretation of expected headline inflation, conditional to medium to long-term demand and. This approach could provide a more accurate assessment of the underlying inflation dynamic.
We find that STC forecasts and acts as a trend for headline inflation and other available ECB core inflation measures, such as the Supercore, the Persistent Common Eurozone. This suggests that alternative measures can offer valuable insights into the trajectory of inflation and potentially guide more effective policy decisions.
Ultimately, the European Central Bank faces a critical decision. Eurozone core inflation has edged down, compounding the dilemma for the European Central Bank over whether to continue the biggest set of interest rate rises since the. A continued focus on potentially misleading core inflation data could lead to policy errors with significant economic consequences. A broader, more nuanced understanding of the drivers of inflation is essential for navigating the current economic landscape and ensuring price stability in the Euro zone.