European Central Bank head: Frequent shocks to economy make inflation
more unpredictable
[July 01, 2025] By
DAVID McHUGH
FRANKFURT, Germany (AP) — The head of the European Central Bank said
inflation has become more unpredictable due to shocks like the COVID-19
pandemic and Russia’s invasion of Ukraine — and that policymakers need
to take the possibility of such extreme scenarios into account and
communicate them to the public as well.
“The world ahead is more uncertain, and that uncertainty is likely to
make inflation more volatile,” ECB President Christine Lagarde said
Monday in a speech opening the central bank's annual conference in
Sintra, Portugal. “It's pretty basic but that's the reality.”
One reason, she said, was that increasingly regular supply disruptions
were leading companies to change their prices more frequently, a habit
that goes beyond the recent burst of inflation in the U.S. and Europe
and “reflects a structural shift in how firms operate under conditions
of permanently higher uncertainty."
The bank's assessment of the economy needs to rely on taking extreme
possible scenarios into account as well as the more likely baseline
predictions, and it should let the public in on those possible outcomes
as well, she said. Lagarde in particular cited the inflation spike that
followed Russia's invasion of Ukraine, where a baseline scenario based
on higher energy prices suggest inflation for 2022 of 5.5% - but a
worst-case scenario indicated more than 7% inflation, much closer to the
final figure of 8%.
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 Another example was the pandemic,
where spending by homebound consumers shifted from services like
restaurants to goods such as home exercise equipment.
“Scenario analysis could have helped in illustrating that the range
of possible inflation outcomes was unusually wide – and would have
reduced the risk of projecting false certainty to the public,”
Lagarde said.
The bank's strategy review announced Monday
reaffirmed its target of 2% for inflation, a goal it has met for the
time being as annual price increases were 1.9% in May. The drop in
inflation has let the bank cut its benchmark interest rate from a
peak of 4% to 2%.
Threats of higher tariffs from U.S. President Donald Trump have
added to uncertainty about the outlook for growth and inflation. The
European Commission and US negotiators are trying to reach agreement
on a trade deal ahead of a July 9 deadline.
The conference in Sintra is the ECB's equivalent of the U.S. Federal
Reserve gathering in Jackson Hole, Wyoming, and gathers top central
bankers and economists from around the world. Fed Chair Jerome
Powell is to take part in a panel on Tuesday with Lagarde, Bank of
England Government Andrew Bailey, Bank of Korea Governor Chang Yong
Rhee and Kazuo Ueda, the governor of the Bank of Japan.
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