SPEECH

Disinflation in the euro area: an update

Speech by Philip R. Lane, Member of the Executive Board of the ECB,
at the University College Dublin Economics Society
Dublin, 15 April 2024

My aim today is to review the recent evolution of inflation in the euro area, together with the implications
for monetary policy. The ECB has held the main policy rate (the deposit facility rate) at 4.0 per cent since
last September. At last week's Governing Council meeting, we indicated that, if our updated assessment of
the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission
were to further increase our confidence that inflation is converging to our target in a sustained manner, it

would be appropriate to reduce the current level of monetary policy restriction."

Chart 1 shows the evolution of headline and core inflation since 2019/4]. Let me focus on the disinflation
patterns since August 2023. Inflation stood at 5.2 per cent last August and has subsequently declined to
2.4 percent in March. Energy inflation has moved from -3.3 per cent last August to -1.8 per cent in March;
food inflation has declined from 9.7 per cent to 2.7 per cent; and core inflation has fallen from 5.3 per cent
to 2.9 per cent. Looking at the individual subcomponents of core inflation, there has been a reduction in
goods inflation from 4.7 per cent to 1.1 per cent, and in services inflation from 5.5 per cent to 4.0 per cent.

Chart 1
Headline inflation and core inflation

Annual percentage changes

= HICP
m= HICPX

12

-2
Jan-19 JuL19 Jan-20 Jul-20 Jan-21 Jul-21 Jan-22 Jul22 Jan-23 JulL-23 Mar-24

Sources: Eurostat.
Notes: HICP refers to headline inflation and HICPX to HICP excluding food and energy. The latest observations for
HICP and HICPX are for March 2024 (flash).

In terms of the array of underlying inflation measures tracked by the ECB, Chart 2 shows the evolution of
the refined versions of these measures, which adjust for the dynamic impact of energy shocks and supply

bottlenecks./2] The improvements in these measures since August 2023 suggest that the observed
disinflation has a substantial persistent component. At the same time, there has been much less progress
in relation to domestic inflation compared to broader inflation measures, reflecting the higher sensitivity of
domestic inflation to local cost pressures. As captured in Chart 3, the overall disinflation rate largely
reflects the unwinding of the supply shocks that were the primary source of the inflation surge in 2021-
2022.

Chart 2
Adjusted measures of underlying inflation

Annual percentage changes

mm HICPX

= HICP excluding energy
m= HICPXX = Supercore
= Domestic inflation = PCCI
= HICP excluding unprocessed food and energy tm PCCI excluding energy
5
4
3

1
Aug-23 Sep-23 Oct-23 Nov-23 Dec-23 dan-24 Feb-24 Mar-24

Sources: Eurostat and ECB staff calculations.

Notes: HICP refers to headline inflation, HICPX to HICP excluding food and energy, HICPXX to HICP excluding food,
energy, travel-related items and clothing, and PCCI to Persistent and Common Component of Inflation. The "adjusted"
measures abstract from energy and global supply bottleneck shocks using a large SVAR, as explained in Banbura, M.,
Bobeica, E. and Martinez Hernandez, C. (2023), "What drives core inflation? The role of supply shocks",
Working Paper Series, No 2875, ECB. The latest observations are for March 2024 (flash) for HICPX, HICP excluding
energy and HICP excluding unprocessed food and energy, and February 2024 for the rest.

Chart 3
Sources of annual price inflation in the euro area

Annual percentage changes and percentage point contributions

a siinitial conditions Mm OProductivity

ss Labour market @tm Lockdown

Mm CE nergy Residuals

Mm SFood === = = Annual HICP inflation
@m ss Shortages

12

2020 2021 2022 2023

Source: ECB calculations based on Arce, A., Ciccarelli, M., Kornprobst, A. and Montes-Galdon, C. (2024), "What
caused the euro area post-pandemic inflation?", Occasional Paper Series, No 343, ECB.

Notes: The figure shows a decomposition of the sources of annual HICP inflation between the first quarter of 2020 and
the fourth quarter of 2023 based on the solution of the full model and the implied impulse response functions. The
continuous line shows actual inflation, and the total net heights of the bars are the model's forecast of inflation in each
period, given initial conditions up to the fourth quarter of 2019. The contributions of the residuals are computed as the
difference between actual and simulated data. The dark blue portion of each bar shows the contribution of pre-2020
data. The coloured segments of each bar show the general equilibrium, fully dynamic contribution of each exogenous
variable to inflation in that period, as implied by the estimated model. Shocks to the rate of change of the relative price
of energy and food are constructed as deviations in the values of those variables from zero. Shocks to the shortages
variable are constructed as deviations in the values from the sample mean. Shocks to the vacancy-to-unemployment
ratio (labour market variable) are constructed as the actual value minus the value in the fourth quarter of 2019.

The role of monetary policy in the disinflation process has been to ensure that the large and persistent but
temporary inflation shocks did not mutate into an increase in the medium-term inflation trend through the

de-anchoring of inflation expectations. Since 2022, the central tendency distribution of longer-term inflation
expectations has remained largely centred at the two percent target, reflecting the general credibility of the

ECB's commitment to delivering its inflation target. Since last summer, a range of measures show that
near-term inflation expectations have also come down and that the risk of inflation staying above target in
the long term has diminished. Charts 4 to 8 shows the evolution of various indicators of inflation
expectations and inflation risk: Chart 4 shows the right tail in the distribution of long-term inflation
expectations in the Survey of Professional Forecasters has markedly diminished compared to the peak
inflation phase in late 2022; Chart 5 shows that the inflation risk premium embedded in five-year-on-five-

year inflation swaps has declined by about 40 basis points since last summer; Chart 6 shows that the
option-implied probability of above 2.5 per cent inflation in the five-year-on-five-year interval has dropped,
while the option-implied probability of below 1.5 per cent inflation has picked up; Chart 7 shows that,
according to the Consumer Expectations Survey, households have recognised the improvement in
inflation outcomes and marked down their near-term inflation expectations; finally, Chart 8 shows that,
according to the results from the survey on the access to finance of enterprises (SAFE), firms have
lowered their near-term inflation expectations, while the proportion of firms that fear high inflation in the

medium term has decreased.

Chart 4
Survey of Professional Forecasters (SPF): distribution of longer-term inflation
expectations

Percentage of respondents

@ 202402
© 202303
@ 202204
60
50
40
30
20
10
0
<1.2 13 14 15 1.6 17 18 19 2.0 24 22 23 24 225

Sources: SPF and ECB calculations.

Notes: The vertical axis shows percentages of respondents; the horizontal axis shows the HICP inflation rate. Longer-
term expectations refer to 4-5 years ahead. The latest observations are for SPF for the second quarter of 2024.

Chart 5
Decomposition of five-year-in-five-year inflation-linked swap (ILS) rate

Annual percentage changes

meee I= Euro area Sy5y ILS expectation component
eee = Euro area SySy ILS

2:26:

1.76
Aug-23 Sep-23 Oct-23 Nov-23 Dec-23 Jan-24 Feb-24 Mar-24 11-Apr

Sources: Bloomberg and ECB calculations.

Notes: Premia-adjusted forward ILS rates are average estimates from two affine term structure models as in Joslin,
Singleton and Zhu (2011) applied to ILS rates non-adjusted for the indexation lag; see Burban et al. (2022), Economic
Bulletin, Ilssue 8, ECB, Box 4. The latest observations are for 11 April 2024.

Chart 6
Option-implied probabilities of inflation outcomes

Percentages

me SySy < 1.5%
wee Sy Sy > 2.5%
60

50

40

30

20

10

Aug- 23 Aug- 23 Sep-23 Oct-23 Oct-23 Nov-23 Dec-23 Dec-23 Jan-24 Feb-24 Feb-24 Mar-24  11-Apr

Sources: LSEG, Bloomberg and ECB calculations.

Notes: Five-day moving average risk-neutral probabilities of inflation implied by five-year and ten-year zero-coupon
inflation options. The depicted probabilities are risk-neutral probabilities affected by risk premia and should therefore
not be interpreted as "real world" (or physical) probabilities. The latest observations are for 11 April 2024.

Chart 7
ECB consumer expectations survey

Annual percentage changes

= Perception of past inflation
= Inflation expectations 1y ahead
== Inflation expectations 3y ahead

2
Aug-23 Oct-23 Dec-23 Feb-24

Source: ECB Consumer Expectations Survey (CES).

Notes: The series refer to the median value. The latest observations are for February 2024.

Chart 8

Firms' expectations about euro area inflation at different horizons

Percentages per annum

eInterquartile range «Median « Mode
g

8

I I
; :

1 year

~

os

nN

Jun-23
Dec-23
Mar-24
Jun-23
Dec-23
Mar-24
Jun-23
Dec-23
Mar-24

3 year 5 year

Sources: Survey on the access to finance of enterprises (SAFE) and ECB calculations.

Notes: Survey-weighted median, mode and interquartile ranges of firms' expectations about euro area inflation in one
year, three years and five years respectively. Quantiles are computed by linear interpolation of the mid-distribution
function. All enterprises. The latest observations are for March 2024.

The lowering of perceived inflation risk is plausibly connected to the faster-than-expected decline in
inflation in recent months, which has provided reassurance that inflation would not remain too far away
from target for too long. This is captured in Chart 9, which shows the evolution of the projected 2024
inflation rate over the September, December and March projection rounds. Chart 10 also shows the
downward revisions to the 2024 growth rate over these projection rounds.

Chart 9
Inflation in 2024

Annual percentage changes

Headline HICP
3.5
3.0
2.5
2.0
1.5
2023-Sep 2023-Dec 2024-Mar

ECB/Eurosystem staff projections

35

3.0

25

2.0

15

2023-Sep

HICP excluding energy and food

2023-Dec

2024-Mar

EcB/Eurosystem staff projections

Source: ECB and Eurosystem staff projections.

Chart 10
Real GDP growth in 2024

Annual percentage changes

1.2

1.0

0.8

0.6

0.4

0.2

0.0
Sep 23 Dec 23 Mar 24

ECB/Eurosystem staff prqections

Source: ECB and Eurosystem staff projections.

Despite the overall disinflation trend, services inflation remains high at 4.0 per cent. The decline in
services inflation since last summer has largely been in non-labour-intensive services sectors, reflecting
the indirect impact of lower energy prices, the easing of supply bottlenecks and the fading out of pandemic
reopening effects on these sectors. As shown in Chart 11, there is a relatively tight medium-term relation
between wage inflation and the inflation rate for labour-intensive services sectors (which make up a large
part of the domestic inflation component). Over time, deceleration in wage growth is necessary in order for
services inflation to converge to a rate that is consistent with meeting the two per cent target for overall

inflation.

Chart 11
Services inflation developments

Annual percentage changes

= Wage-sensitive services = Services
= Not wage-sensitive services = Compensation per employee services
== Contact-intensive services = Rentinflation

8

7

6

5

4

3

2

1

Jan-22 Jul-22 Jan-23 Jul 23 Jan-24

Sources: Eurostat and ECB calculations.
Latest observations are for the fourth quarter of 2023 for compensation per employee, March 2024 (flash) for services
inflation and February 2024 for the rest.

Wage pressures are gradually moderating but remain elevated compared to a steady-state benchmark. As
shown in Chart 12, annual growth in compensation per employee decelerated in the fourth quarter of last
year to 4.6 per cent, from 5.1 per cent in the third quarter. Growth in compensation per hour also slowed,
falling in annual terms to 4.4 per cent in the fourth quarter from 5.0 per cent in the third quarter. The wages
and salaries component of the labour cost indicator decreased to 3.3 per cent in the fourth quarter from
5.1 per cent in the third quarter. Annual unit labour cost growth fell to 5.8 per cent, from 6.5 per cent, but
remained high, in part reflecting weak productivity growth. Negotiated wage growth including one-off
payments also declined further, falling to 3.2 per cent in January from 4.8 per cent in December, although
this figure does not yet include the data for France and Italy.

Chart 12
Labour cost indicators

Annual percentage changes and percentage point contributions

= Compensation per employee o8 Wage drift
= Compensation per hour = Unit labour costs
= Negotiated wages = Labour cost index

Sources: Eurostat, ECB and ECB staff calculations.
Notes: The labour cost index refers its wages and salaries component. The latest observations are for the fourth
quarter of 2023.

As shown in Chart 13, forward-looking wage trackers also continue to provide signs of easing. As shown in
Charts 14 and 15, the feedback from firms participating in the Corporate Telephone Survey (CTS) and the
SAFE point to lower wage growth this year. The March projections foresee subsequent phases of further
wage deceleration in 2025 and 2026, with the growth rate of compensation per employee declining from
5.3 per cent in 2023 to 4.5 per cent in 2024, 3.6 per cent in 2025 and 3.0 per cent in 2026.

Chart 13
Wage trackers

Annual percentage changes

= ECB wage tracker including one-off payments

uu Forward-looking ECB wage tracker including one-off payments

== ECB wage tracker - average of agrements signed in last quarter including one-offs
== Indeed wage tracker

2
Jan-23 Jul-23 Jan-24 Jul-24

Sources: ECB, national central banks, Central Band of Ireland and the Dutch employer association (AWVN).

Notes: Euro area aggregate based on Germany, France, Italy, Spain, Netherlands, Austria and Greece. The indicator
"average of agreements signed in last quarter including one-offs" displays the average growth rate of contracts signed
in a given quarter in the first four quarters of signing. One-off payments are spread over the 12 months from the
disbursement date. The latest observations are for the first quarter of 2024 (preliminary) for the latest agreements, and
March 2024 for the wage trackers.

Chart 14
CTS wage expectations

Number of responses

@ 2023

®@ 2024
25
20
15
10
I : I I

0-1% 1-2% 2-3% 3-4% 45% 5-6% 6-7% 7-8% 8+%

Sources: ECB and April 2024 Corporate Telephone Survey (CTS).
Note: 54 responses for 2023 and 53 responses for 2024.

Chart 15
SAFE wage expectations for one year ahead

Percentage changes over the next 12 months

mmr Services wm Manufacturing --@ Trade

coir Construction - -t- All firms:

Mar-23 Jun-23 Sep-23 Dec-23 Mar-24

Sources: Survey on the access to finance of enterprises (SAFE) and ECB calculations.

Notes: Survey-weighted mean euro area firm expectations of changes in wages of current employees. Computed after
trimming at the wave-country-specific 1st and 99th percentiles - all enterprises. The latest observations are for March
2024.

In addition to wage growth deceleration, the convergence of inflation to the target also requires
compression in profits. As reflected in Chart 16, annual growth in unit profits decelerated further in the
fourth quarter, falling to 2.8 per cent from 4.7 per cent in the third quarter. This significant decline was the
main driver of the reduction in the annual growth rate of the GDP deflator, which fell by 0.6 percentage
points to 5.3 per cent. As embedded in the March projections exercise, further compression in profits is
required to support the convergence of inflation to the target, and a sufficiently restrictive monetary policy
stance is necessary to provide the dampened demand conditions to limit the pass-through of rising costs

to consumer prices.

Chart 16
GDP deflator

Annual percentage changes and percentage point contributions

@ Unit labour costs Mi Unit net taxes
M Unit profits == GDP deflator
7
6
13)
4
3

o
NS:

Wd

\N

2201 2203 23a1 23Q3 2024 2025 2026

Sources: Eurostat and ECB calculations.

Notes: Unit taxes reflect taxes minus subsidies. When the contribution of subsidies on products is larger than the
contribution of indirect taxes, the unit tax contribution turns negative. The latest observations are for the fourth quarter
of 2023.

In monitoring the transmission of the monetary policy stance, Chart 17 records the policy rate time series
(together with the market-priced forward path) and Chart 18 the contraction in the Eurosystem balance
sheet; Chart 19 depicts the evolution of the risk-free yield curve; Chart 20 plots bank lending rates for firms
and households; Charts 21 and 22 report credit standards for firms and households; finally, Charts 23 and
24 report credit volumes for firms and households.

Chart 17
€STR forward curve and deposit facility rate (DFR); APP, PEPP and TLTROs

Percentages per annum

mm §=€STR forward curve (11 Apr 24)
mm Realised DFR

1.0
2020 2021 2022 2023 2024 2025 2026

Sources: Bloomberg and ECB calculations.
Note: The latest observation is 11 April 2024.

Chart 18
APP, PEPP and TLTROs

Trillion euros

m ape
mtm PEPP
@ TLTROs

2020 2021 2022 2023 2024

Sources: ECB calculations.

Note: Purchase programmes are based on book value at amortised cost. The latest observation is 5 April 2024.

Chart 19
Euro area Overnight Index Swap (OIS) yield curve

annual percentages

wm April 2024 m= December 2021
ee December 2022 == April 2021

1 2 3 4 6 6 7 g 9 10
Maturity (years)

Sources: Bloomberg and ECB calculations.
Notes: The curves refer to 21 April 2021, 15 December 2021, 14 December 2022 and 11 April 2024 respectively. The
latest observations are for 11 April 2024.

Chart 20
Lending rates for new and outstanding amounts: firms and households for house
purchase

percentages per annum

= New business volumes -firms
"== New business volumes - households
== Outstanding amounts- firms
"" Outstanding amounts- hous eholds

Jan-22 Jul-22 Jan23 Juk23 Jan-24

Source: ECB (MIR).

Notes: Interest rates on new business volumes refer to the indicator for the total cost of borrowing for firms and
households for house purchase, which is calculated by aggregating short-term and long-term rates on new business
using a 24-month moving average of new business volumes. The latest observations are for February 2024.

Chart 21
Change in credit standards and demand for loans to firms, and contributing factors

net percentages of banks

mmmems Other factors wees Other factors
wees Risk tolerance of banks mmm Use of alternative finance
emer Risk perceptions ees Other financing needs
eee Competition errr General level of interest rates
wees Cost of funds and balance sheet constraints seen Inventories and working capital
ee Credit standards - actual moms Fixed investment
Credit standards - expected er Demand - actual
Demand - expected
Credit standards Demand
40 60
[I o i
30 =
20
20 a
-20
10 -40
-60
it}
-80 -
-
-10 -100
on on on a 2 © 2 © = = on on on i ° © o ° = =
aS a a a a a a a a a a a a a a a a a a a
S S 5 = = 8 = S = = 5 5 Ss S = Ss = = = Ss
a a a a a a a & a a a a a a a a a a a a
= nN o 1 = nN ro = = nN = nN o = = nN o + = nN
o o o G o o o o So o o o 3 So o o G 3G o o

Source: ECB (BLS).

Notes: Left panel: "Other factors" refer to further factors mentioned by banks as having contributed to change in credit
standards. Right panel: "Other financing needs' is the unweighted average of "M&A and corporate restructuring" and
"debt refinancing/restructuring and renegotiation"; "Use of alternative finance" is the unweighted average of "internal

financing", "loans from other banks', "loans from non-banks', "issuance/redemption of debt securities" and
"issuance/redemption of equity".

The latest observations are for the first quarter of 2024.

Chart 22
Change in credit standards and demand for loans to households for house purchase,
and contributing factors

net percentages of banks

seems Other factors seme Housing market prospects
semen Risk tolerance of banks umes Consumer confidence
wwe Risk perceptions mews General level of interest rates
w= Competition ume Other financing needs
em Cost of funds and balance sheet constraints wees Use of alternative finance
-- Credit standards - actual wees Other factors
Credit standards - expected ome Demand - actual
Demand - expected
Credit standards Demand
40 40

30

20

10

-10

>
3 8
on? I

Q1 2022
Q2 2022
Q3 2022
Q4 2022
Q1 2023
Q2 2023
Q3 2023
Q4 2023
Q1 2024
Q2 2024
Q1 2022
Q2 2022
Q3 2022
Q2 2023
Q3 2023
Q4 2023
Q1 2024
Q2 2024

Source: ECB (BLS).

Notes: Left panel: "Other factors" refer to further factors mentioned by banks as having contributed to change in credit
standards. Right panel: "Other financing needs' is the unweighted average of "debt refinancing/restructuring and
renegotiation" and "regulatory and fiscal regime of housing markets"; and "Use of alternative finance" is the
unweighted average of "internal finance of house purchase out of savings/down payment", "loans from other banks"
and "other sources of external finance". The net percentages for "Other factors" refer to an average of the further
factors which were mentioned by banks as having contributed to changes in loan demand.

The latest observations are for the first quarter of 2024.

Chart 23
Net debt financing flows of euro area firms

left scale: average monthly flows, in EUR billions; right scale: annual percentage changes

50

25

-25

Sources: ECB (BSI, CSEC) and ECB calculations.

@  Bankloanstofirms
HH Netissuance ofdebtsecurities
== Annual growth rate of net debt financing - rightscale

~

2022 01

2022 Q2

2022 Q3

=
--
a
SI

2022 Q4

2023 01

2023 Q2

2023 Q3

Oct-23

Nov-23

Dec-23

Jan24

Feb-24

10

°

5

Notes: The net issuance of debt securities is seasonally adjusted internally. Bank loans to firms are adjusted for sales,

securitisation and cash pooling. The latest observations are for February 2024.

Chart 24
Bank loans to households

left scale: average monthly flows, in EUR billions; right scale: annual percentage changes
tm@ Loans forhouse purchase
@ = Creditfor consumption
@ Other lending
== Annual growth rate of total lending-rightscale

2022 Q1
2022 Q2
2022 Q3
2022 Q4
2023 Q1
2023 Q2
2023 Q3
Oct-23
Nov-23
Dec-23
Jan24
Feb-24

Sources: ECB (BSI) and ECB calculations.

Notes: Bank loans to households are adjusted for sales and securitisation. The latest observations are for February
2024.

Finally, it should be recognised that the current phase of disinflation is necessarily bumpy. In particular, the
swings in energy prices during 2023 will generate oscillations in base effects in the monthly inflation
readings, while the staggered reversal of various temporary fiscal supports will also operate on the price
level in an uneven manner. Chart 25 plots a range of indicators of near-term inflation dynamics and the
projected quarterly evolution of headline and core inflation according to the March projections. Headline
inflation is expected to fluctuate around current levels in the near term on account of base effects in the
energy component and the reversal of the upward effect of the early timing of Easter on services inflation
in March. While services inflation should decline somewhat in the near term, it is expected to remain
relatively elevated for most of this year.

Chart 25
Short-term forecasts for HICP (left) and HICPX (right)

Annual percentage changes

@ HICPIHICPX

= Consensus (8 April 2024)

A March 2024 ECB staff projections
== Regression forest mean

== Fixings (11 April 2024)

35 35
3.0 3.0
25 25 A A
A
20 2.0
15 15
9 a 1.0
Mar-24 Jun-24 Sep-24 Dec-24 - Mar-24 Jun-24 Sep-24 Dec-24

Sources: Eurostat, March 2024 ECB staff macroeconomic projections for the euro area, Consensus Economics,
Bloomberg and ECB calculations.

Notes: The cut-off date is 3 April 2024 for the regression forest and 11 April 2024 for fixings. Consensus Economics
data were collected on 8 April 2024. The quantile regression forest estimates are from Lenza, M., Moutachaker, I. and
Paredes, J. (2023), "Density forecasts of inflation: a quantile regression forest approach", Working Paper
Series, No 2830, ECB. The HICP fixings are observed market prices. The HICPX fixings are estimated based on the
model in Grgnlund, A.M., Jrgensen, K. and Schupp, F. (2024), "Measuring market-based core inflation
expectations", Working Paper Series, No 2908, ECB. The latest actual observation is for March 2024 (flash).

Even if the near-term inflation outlook is somewhat bumpy, the projected convergence of inflation to the
target in 2025 will be underpinned by: the lowering of labour cost pressures; some additional compression
of unit profits; the dissipation of the adverse effects of past energy shocks, supply bottlenecks and the
pandemic re-opening; and the further unfolding of the disinflationary impact of the restrictive monetary
policy stance. This disinflationary dynamic is consistent with both inflation stabilising at our target in 2025
and a substantial economic recovery, with rising real incomes and improvements in the terms of trade,
together with the prospect of dis-inflation unlocking future interest rate reductions, boosting domestic
consumption and investment, while the normalisation of foreign demand will facilitate growth in exports.

This review of the disinflation path in recent months and the analysis of the drivers of inflation over the
projection horizon indicate that, based on the three elements of our reaction function we can conclude that
the key ECB interest rates are at levels that are making a substantial contribution to the ongoing
disinflation process. Our future decisions will ensure that our policy rates will stay sufficiently restrictive for

as long as necessary. If our updated assessment of the inflation outlook, the dynamics of underlying
inflation and the strength of monetary policy transmission were to further increase our confidence that
inflation is converging to our target in a sustained manner, it would be appropriate to reduce the current
level of monetary policy restriction. In informing this assessment, the June Governing Council meeting will
benefit from updated staff projections and the accumulation of data about the dynamics of wages and
profits in the opening months of this year. In any event, we will continue to follow a data-dependent and
meeting-by-meeting approach to determining the appropriate level and duration of restriction, and we are
not pre-committing to a particular rate path.

1.
On navigating the transition from the "holding" phase to the "dialling back" phase of the tightening cycle of

monetary policy, see Lagarde, C. (2024), "Building confidence in the path ahead", speech at The ECB and

its Watchers XXIV Conference, organised by the Institute for Monetary and Financial Stability, Goethe
University, Frankfurt am Main, 20 March.

2.

I maintain a narrow focus in this speech on the patterns since August 2023. I rec ntly provided a
comprehensive overview of the disinflationp o ssinL n ,PR (2024), "Disinfl tion in the euro area",
speech at the Hutchins Center on Fiscal & Monetary Policy at the Brookings Institution, Washington, D.C.,

8 February.

3.

See M. Banbura, E. Bobeica, K. Bodnar, B. Fagandini, P. Healy and J. Paredes, Underlying inflation
measures; an analytical guide for the euro area, Economic Bulletin Issue 5, 2023. While domestic inflation
is not to be interpreted as a measure of the underlying rate of aggregate inflation, it is still useful to include
it since domestic inflation should be more sensitive to the domestic monetary stance and it tends to be

more persistent than the imported component of inflation.

4.

In fact, the inflation surge initially served to "re-anchor from below" inflation expectations at the target: until
2022, a significant proportion of professional forecasters (and market participants) believed that the ECB
would not be able to bring inflation up to the target, in view of the effective lower bound constraint.

5.

In terms of their own pricing intentions, firms report that price increases will be lower in 2024 compared to

2023.