RegStream

Inflation in the euro area: causes and outlook

Prof. Dr. Isabel Schnabel, Member of the Executive Board of the ECB

Economic Council, 25 November 2021

Rapid rise in consumer prices in the euro area after years of low inflation Rubric

Inflation in the euro area

(annual % change)

HICP

Average 2009-2019

Average since January 2020

Average 1999-2008

ECB inflation target (2%)

4. 1%

2. 2%

1. 3%

1. 1%

5

4

3

2

1

0

-1

1999

2003

2007

2011

2015

2019

Source: ECB.

Last observation: October 2021.

2

www. ecb. Europe. eu ©

Negative real interest rates not uncommon, but current real interest rates very low Rubric

Inflation-adjusted savings income in Germany

(annual % change)

Real interest rate

Average 1975-1998: -0. 08%

Introduction of the euro, 1 January 1999

Average 1999-2021: -0. 63%

4. 0

3. 0

2. 0

1. 0

0. 0

-1. 0

-2. 0

-3. 0

-4. 0

-5. 0

1975

1980

1985

1990

1995

2000

2005

2010

2015

2020

Source: Deutsche Bundesbank and ECB calculations.

Note: Deposit interest rates of banks for savings deposits with minimum interest rates, with an agreed notice period of 3 months until 2003, then effective interest rates of German banks on deposits of private households with a notice period of up to 3 months. Deflated by HICP inflation for Germany in 1991 for the entire time series. The consumer price index (CPI) calculated by the Federal Statistical Office on a monthly basis is used to measure the development of purchasing power.

Last observation: September 2021.

3

www. ecb. Europe. eu ©

Banks in the euro area increasingly pass on negative nominal interest rates to customers Rubric

Share of deposits from households with

Share of deposits of enterprises with

negative interest rate in selected countries

negative interest rate in selected countries

(Share of deposits)

(Share of deposits)

10%

90%

43%

57%

Zero interest rates or positive interest rates

Negative interest rates

Sources: ECB (iMIR, iBSI) and ECB calculations.

Notes: The country selection includes Austria, Belgium, Estonia, Finland, France, Germany, Latvia, Lithuania, Luxembourg, Malta, the Netherlands and Slovakia. Interest rates on deposits refer to the outstanding portfolio and are based on reports from banks for the available product categories. The values were weighted with the respective volume of the outstanding stock. Household deposits include household deposits (according to ESA 2010, p. 14) and deposits from households classified as non-profit institutions (p. 15). The figures refer to the average value from April to September 2021.

4

www. ecb. Europe. eu ©

Significant decline in pre-pandemic inflation expectations, since rubric rise

Market-based long-term inflation expectations

(percent p. a. )

Inflation-indexed forward swap rate 1y9y

Outbreak of the pandemic

3. 0

2. 5

2. 0

1. 5

1. 0

0. 5

2006

2008

2010

2012

2014

2016

2018

2020

Sources: Refinitiv and ECB calculations.

Last observation: November 22, 2021.

5

www. ecb. Europe. eu ©

Unemployment rate outside Germany still above the level of 2008 Rubric

Unemployment rate (% of labour force)

Euro area excluding Germany

Germany

16

14

12

10

8

6

4

2

0 1999

2002

2005

2008

2011

2014

2017

2020

Source: Eurostat.

Last observation: Q3 2021.

6

www. ecb. Europe. eu ©

Demographic change as a brake on investment Rubric

Expected population growth

working age (16-64 years): 2020 – 2035

(percent)

4

2

0

-2

-4

-6

-8

-10

-12

-14

UNITED STATES

UK

France

China

Japan

Germany

Italy

Sources: United Nations, Haver Analytics.

7

www. ecb. Europe. eu ©

Noticeable decline in interest rates long before ECB Rubric bond purchases

Yield on a 10-year German government bond

(percent)

Start of bond purchases

1988

1996

2004

2012

2020

12

10

8

6

4

2

0

-2

1980

Source: GFD economic data and Refinitiv.

Last observation: October 2021 (monthly data).

8

www. ecb. Europe. eu ©

Existing interest rate margin largely exhausted Rubric

Key ECB interest rates

(percent)

Interest rate on the marginal lending facility

Interest rate on main refinancing operations

Interest rate on the deposit facility

7. 0

6. 0

5. 0

4. 0

3. 0

2. 0

1. 0

0. 0

-1. 0

1999

2002

2005

2008

2011

2014

2017

2020

Source: ECB.

Last observation: November 22, 2021.

9

www. ecb. eu ©

Expected weakening of inflation over the medium term Rubric

September 2021 HICP forecast by Eurosystem experts

(annual % change)

3. 5

3. 0

2. 5

2. 0

1. 5

1. 0

0. 5

0. 0

-0. 5

-1. 0

2821

Source: ECB.

Start of forecast

ECB inflation target

19Q1

1021

1121

1221

1321

10

www. ecb. Europe. eu ©

Current inflation partly driven by statistical effects Rubric

Biennial change in inflation in the euro area

(%)

HICP (biennial change)

Average since 1999

ECB inflation target (2%)

3

2. 5

2

1. 5

1

0. 5

0

-0. 5

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

2019

2021

Source: ECB.

Last observation: October 2021.

11

www. ecb. Europe. eu ©

Stronger price increase taking into account owner-occupied residential property Rubric

HICP and HICP with

owner-occupied residential property

(annual percentage change)

HICP

HICP + owner-occupied residential property (net acquisition concept)

Difference (right axis)

4

3

2

1

0

-1

-2

-3

-4

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Source: ECB.

Final observation: September 2021 for HICPs (Q3 2021), July 2021 for HICPs with owner-occupied housing (Q2 2021). The HICP for owner-occupied residential property is based on the net acquisition concept.

Price development of residential real estate

(annual percentage change)

Euro area

Germany

14

12

10

8

6

4

2

0

-2

-4

-6

0. 4

0. 3

0. 2

0. 1

0. 0

-0. 1

-0. 2

-0. 3

-0. 4

1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021

Source: ECB.

Last observation: July 2021 (2nd quarter 2021) for EA and September 2021 (2nd quarter 2021) for Germany.

12

www. ecb. Europe. eu ©

Overestimation of the inflation outlook before the pandemic, underestimation after Rubric

Inflation forecasts by Eurosystem experts

for the HICP over time

(annual % change)

HICP

ECB inflation forecast (September 2021)

Past ECB inflation forecasts (different colours)

Prognosis start

3. 5

3

2. 5

2

1. 5

1

0. 5

0

-0. 5

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Source: ECB.

13

www. ecb. Europe. eu ©

Strongest increase in producer prices in Germany since 1975 Rubric

Producer prices in Germany

(annual % change; total industry excluding construction; Domestic market)

20

15

10

5

0

-5

-10

1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018 2021

Source: ECB.

Last observation: October 2021.

14

www. ecb. Europe. eu ©

More companies pass on cost increases to customers Rubric

Purchasing Managers' Index for the euro area: output prices

(50 = no change on the previous month)

Euro area

65

60

55

50

45

40

35

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

Source: ECB.

Last observation: October 2021.

15

www. ecb. Europe. eu ©

No indication of a wage-price spiral in the euro area and in Germany Rubric

Collectively agreed wages in the euro area and in Germany

(annual percentage change)

Euro area

Germany

4. 5

4. 0

3. 5

3. 0

2. 5

2. 0

1. 5

1. 0

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

2019

2020

2021

Source: ECB.

Last observation: Q3 2021.

16

www. ecb. Europe. eu ©

Rubric

Thank you for your attention!

www. ecb. Europe. eu ©