the long shadow of high inflation 32nd frankfurt european banking congress 18. 11. 2022 | frankfurt am main | joachim nagel 1 introduction 2 inflation in the focus of public attention 3 scarring effects of personal experiences 4 monetary policy must act decisively to attain price stability 5 conclusion 1 introduction ladies and gentlemen first, i would like to thank you for the invitation. it is a pleasure and an honour for me to speak here to such a distinguished audience. “ a situation where ordinary people in their ordinary course of business are not thinking and worrying about inflation. ” [ 1 ] this is how alan blinder once defined price stability. unfortunately, we are far from that : almost everybody is thinking and worrying about inflation these days. the goal of price stability is currently being missed. that ’ s what the numbers tell us, and people are experiencing it first - hand. for many, soaring prices are the most pressing problem in their daily lives. accordingly, price developments have become the focus of public attention. the eurosystem is committed to price stability. we must ensure that high inflation rates do not become entrenched, and that they return to our target of 2 % in the medium term. we therefore have to act decisively. and that is exactly what we are doing in the governing council. i will go into more detail in the second part of my speech. but will high inflation also disappear from people ’ s minds once it has disappeared from the measurement of consumer prices? or could the present experience of unusually high inflation rates leave a lasting mark on people ’ s behaviour? what economic research has found on these questions and why it matters for monetary policy will be my first topic. 2 inflation in the focus of public attention to understand the impact of current price pressures, it is important to recall where we have come from. a long period of low inflation rates lies behind us. in low - inflation environments, households and firms tend to pay only little attention to inflation dynamics. [ 2 ] they have less incentive to track inflation closely as its relevance for economic decisions is relatively small. but the environment has changed fundamentally : inflation has returned with a force that hardly anyone thought possible. this year we are experiencing the highest inflation rates in decades. in germany, the annual inflation rate has reached double digits. the last time this happened was in 1951, more than 70 years ago. in this new environment, households and firms can no longer afford to ignore inflation. everyone is worried about their next gas and electricity bills and

so far. even after the rate hikes, the relevant policy rate is still in the expansionary range. various measures suggest this, such as still very low short - term real interest rates or the gap between taylor rates and the policy rate. in abnormal times with inflation in double digits, a mere normalisation of monetary policy might not be enough. if high inflation threatens to become entrenched, we must resolutely raise our key rates further and adopt a restrictive stance. if we don ’ t act decisively now, we run the risk of having to tighten monetary policy all the more later. that would put even more strain on households, businesses and the financial system. this is why it would be wrong to hold back on further decisive steps for fear of a downturn. of course, we are closely watching the development of economic activity. and yes, to the extent that output is growing more slowly or is falling due to weaker aggregate demand, there will be less inflationary pressure. this is, by the way, part of our monetary transmission process. but as far as we can see, this development in itself is insufficient to put inflation back on track. unrestrained inflation is in itself a great burden on the economy. the longer inflation remains high, the more it weighs on consumption and investment and the more it influences wage and price setting. and the higher the risk of long - term inflation expectations straying away from our inflation target of 2 %. this must be prevented! we also need to look at the eurosystem ’ s high bond holdings. they continue to exert considerable downward pressure on bond yields in the euro area. it doesn ’ t match up to raise the yield curve at the short end while keeping it down at the long end. in my view, we should start reducing the size of our bond holdings at the beginning of next year by no longer fully reinvesting all maturing bonds. the additional tightening would help to bring inflation down. and it would underline our strong determination to bring inflation back to our target. monetary policy is responsible for ensuring price stability. there is no doubt about that. the eurosystem has to deliver : the people in the euro area should be able to rely on us to fulfil our mandate and ensure price stability. that is my top priority. there is still a lot of hard work to do. inflation is a tough nut to crack. if we want to crack it, monetary policy has to be tough,