Central banks have lost trust
The ECB is on the home stretch in combating excessive inflation. Despite an increase in inflation at the turn of the year, there is a good chance that the central bank will be able to stabilise price increases at 2% in 2025 – even if this is not a sure thing, given wage developments and the threat of US punitive tariffs.
However, the general population is much more pessimistic about the future than the ECB. As several surveys published at the end of 2024 show, inflation is one of people's biggest concerns. In a study in Germany for example, fear of rising prices came in first place, ahead of concerns about divisions in society, or immigration policy.
Better too low than too high
This should be a warning shot for the ECB and the national central banks. The population's trust in their performance has suffered lasting damage as a result of the rapid rise in inflation from 2021 onwards. It is therefore extremely important for the monetary authorities to achieve their inflation target this year. The easing of monetary policy must therefore be done cautiously. The ECB disapproves of inflation that is a little too low, just as much as it disapproves of inflation that is too high. But the central bank should accept, in its monetary policy decisions, that inflation may settle at a little below 2%, rather than risk it settling at a little above 2%. Inflation that is a little too low would certainly not damage the public's trust in the work of the ECB.
Consumer concerns
It will also be important for the economy that the ECB and the national central banks succeed in allaying people's fears of a future renewed rise in inflation. The fact that private consumption has not increased noticeably for months, despite real wage gains, is also because consumers often do not notice the recent increase in purchasing power. The rise in inflation in recent years is still present in people's minds.
Price are still generally high, even though inflation rates above 3% are now a thing of the past. The high cost of living is another reason why an inflation rate of slightly less than 2% would be more acceptable in the medium term than an increase above the inflation target.
