By David Mchugh
Frankfurt, Germany (AP) — The head of the European Central Bank said inflation rates have become more unpredictable due to shocks like the Covid-19 pandemic and Russia’s invasion of Ukraine.
“The world ahead is more uncertain, and that uncertainty is likely to make inflation more uncertain,” ECB President Christine Lagarde said on Monday in a speech to hold the central bank’s annual meeting in Sintra, Portugal. “It’s pretty basic, but that’s the reality.”
One reason she said was that increasingly regular supply disruptions led companies to change prices more frequently, a habit that surpassed recent inflation rates in the US and Europe, reflecting structural changes in how companies operate under conditions of everlasting high uncertainty.”
The bank’s economic assessment should take into account potentially extreme scenarios and rely on more likely baseline predictions, which should include the public in those possible outcomes as well, she said. In particular, Lagarde cited the inflationary spike following Russia’s Ukrainian inflation. There, the baseline scenario based on energy prices rise in 2022 suggests inflation of 5.5%, while the worst case scenario showed inflation of over 7%, much closer to the final figure of 8%.
Another example is the pandemic, where spending by consumers for household use has shifted from restaurants-like services to products such as home exercise equipment.
“Scenario analysis could have helped to show that the range of possible inflation outcomes was unusually wide and reduced the risk of projecting false certainty to the public,” Lagarde said.
The bank’s strategy review announced on Monday it reaffirmed its 2% target for inflation. This achieved its target for the time being, as the annual price rise in May was 1.9%. Due to a decline in inflation, banks have reduced benchmark interest rates from 4% to a peak of 2%.
The threat of increased tariffs from President Donald Trump has increased uncertainty about growth and inflation outlook. The European Commission and US negotiators are about to reach an agreement on a trade agreement ahead of the July 9 deadline.
The conference in Sintra is equivalent to the US Federal Reserve ECB, which gathers central bankers and economists from around the world, gathering. Federal Reserve Chairman Jerome Powell will be on a panel with Lagarde, Bank of England, Andrew Bailey Bank, Bank of Korea Governor Jang Yong Lee and Bank of Japan Governor Kazuoudah on Tuesday.
Original issue: June 30th, 2025, 5:19pm EDT
