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ECB’s huge forecasting errors undermine credibility of current forecasts

Zsolt Darvas, (2018), “ECB’s huge forecasting errors undermine credibility of current forecasts”Bruegel, 6 Debember

In its latest projections, on September 13th 2018, ECB staff foresaw a core inflation increase to 1.5% on average in 2019 and further to 1.8% on average in 2020 (core inflation does not include volatile items like energy and food).

Such forecasts, along with the renewed euro-area economic growth and the fall in the unemployment rate, constituted an argument in favour of an important monetary policy normalisation step – namely, the announced termination of net asset purchases by the end of December 2018. The timing of the first interest-rate increase might also be informed by forecasts.

How much trust should we have in the current ECB forecast? In a forthcoming paper I analyse ECB forecasts in some detail, yet let me present the two most important charts in this blog post: core inflation and unemployment rate.

I focus on core inflation and not on headline inflation, because core inflation represents the underlying inflationary pressure. A central bank has hardly any influence over the items excluded from core inflation (energy and food prices), which are primarily driven by outside factors such as weather and supply/demand conditions on global energy markets (in my forthcoming paper I assess other forecasts too: headline inflation, GDP growth and wage growth). The recent work of Grégory Claeys, Maria Demertzis and Jan Mazza also proposed to focus on core inflation.

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