Sentiment in the euro area is brightening. Despite growing COVID incidence numbers, consumers and firms are becoming more upbeat about the future. At the same time, consumer prices are increasing at a faster pace, following years of very low inflation. And it is likely to continue growing until the end of the year. People are understandably worried about these developments.
Higher inflation lowers the purchasing power and reduces wages and interest income in real terms β that is adjusted for inflation. Real interest rates on savings deposits in Germany are now visibly negative after the recent increase in inflation Slide 3. Negative real interest rates are nothing out of the ordinary per se. Both before and after the euro was introduced, there were longer periods of negative real interest rates.
These concerns affect us as central bankers directly β given that the ECB has a clear mandate to ensure price stability. Allusions are being made to conditions in the Weimar Republic. I will start by providing an assessment of recent developments in consumer prices against the backdrop of the long phase of very low inflation and explain why inflation in the euro area, and also in Germany, is likely to ease noticeably next year.
A premature monetary policy tightening in response to a temporary rise in inflation would choke the recovery and be most harmful to those who are already suffering from the current spike in inflation. Finally, I will explain why the higher inflation we are seeing now may actually be positive news. There are good reasons to assume that the current constellation of fiscal and monetary policy in the euro area may finally chart the path out of the low interest rate environment.
The assessment of current and future inflation lies at the heart of our monetary policy decisions that we take to maintain price stability in the euro area as a whole. About every six weeks β and most recently last week β we look at a broad range of economic indicators to assess the future path of inflation.
