Conversation with Isabel Schnabel: “Rate increases are rarely popular”
Ms. Schnabel, the year 2022 is likely to go down in history as the year of high inflation, among other things. Does that apply to you as one of the people responsible for monetary policy on the ECB Executive Board?
High inflation is the central topic that I have been dealing with intensively throughout the year. task of ECB is to ensure price stability. With an inflation rate of more than 10 percent at times, one can hardly speak of price stability. That is why we are doing everything we can to bring inflation back to our medium-term target of 2 percent.
Do you personally feel the extreme price increases in your daily life?
Sure, you notice that everywhere – when shopping, in the restaurant or with the gas bill. But people with a lower income are of course much more affected, they often cannot fall back on savings and suffer particularly from the high energy and food prices.
At what point in the past period did you have the impression that inflation was really getting serious?
I saw early warning signs. In July last year, for example, I pointed out a number of indicators of rising inflation in a speech. However, I didn’t draw the right conclusions from it consistently enough either. For a long time we assumed that many causes of inflation would subside on their own. The 10 percent inflation can be divided into two halves: The first 5 percent came in 2021, the second in 2022. In 2021 it was an aftermath of the pandemic. With the economy reopening, demand has picked up quickly to meet relatively inelastic supply, compounded by supply chain disruptions. This imbalance between supply and demand led to the first price surge.
A certain price boost after Corona was still to be expected?
Yes, but many underestimated the magnitude. It was thought that the supply chain disruptions would recede faster. However, this took much longer than expected. At the end of 2021, inflation was already at 5 percent.
But it didn’t stop there…
Then that year came Russia’s terrible war of aggression against Ukraine. This resulted in another price surge, above all through energy and food prices. Of particular concern was that these price increases have gradually spread to the entire shopping cart. Not only have energy prices risen sharply, but so has core inflation, which is inflation without taking into account the strongly fluctuating prices for energy and food. By then, at the latest, it was clear to everyone that it was a more permanent phenomenon.
You have an academic background and were a member of the Advisory Council. What is it like when you find yourself in a situation for which, at first sight, there doesn’t seem to be a model that can be applied correctly? This is actually not the situation in which economists feel really comfortable, is it?