Achieving better inflation forecasts by incorporating psychology and (geo)politics

“The return of inflation” – 49th OeNB Economics Conference and 35th SUERF Colloquium starts on May 23, 2022

The Governor of the Oesterreichische Nationalbank (OeNB), Robert Holzmann, opens this year’s Economics Conference, which is dedicated to the return of inflation in Europe and around the world.

Addressing the audience of the OeNB’s annual Economics Conference, OeNB Governor Robert Holzmann found it both challenging and intriguing why only few people had foreseen the return of inflation. “When we started organizing this event half a year ago, we put a question mark at the end of the conference title. Back then, for many the return of inflation still seemed to be a remote, albeit not impossible, scenario,” Governor Holzmann said.

Since then, inflation rates in Europe and worldwide have surged to levels last seen more than four decades ago. Have central banks underestimated inflation dynamics in Europe and elsewhere? Should they have adopted a broader approach in their forecasting tools? Have they underrated the implications that (geo)political events may have for economic and inflation developments? Importantly, how can forecasters capture large global trends and supply shortages, for example, related to the green transition? “I sincerely hope that this conference will pave the way toward meeting our price stability target again and that it will help us produce better forecasts – and thus prevent future returns of inflation,” the OeNB Governor noted.

In his statement, Robert Holzmann also stressed that “purely macroeconomic and econometric considerations can only deliver an incomplete picture of the multifaceted phenomenon of inflation.” “Recent research suggests that personal experience exerts an important influence on the formation of inflation expectations, including policymakers’ individual forecasts,” Governor Holzmann added.

The OeNB Governor further argued that Russia’s invasion of Ukraine in late February 2022 is likely to have marked a turning point in European history. From a monetary policy perspective, the conflict puts a fresh spotlight on geopolitics and Europe’s dependency on fossil energy sources as important drivers of inflationary pressures. Strong energy price pressures may, however, also present an opportunity to accelerate the inevitable green transition. “Yet,” Governor Holzmann added, “forceful action against climate change can also imply tradeoffs in terms of price stability.”

Closing his welcome address, OeNB Governor Robert Holzmann suggested that policymakers “would be well advised to listen to those whose lives will be most affected by our decisions today: the younger generations.” According to a Flash Eurobarometer survey conducted in spring 2022, young Europeans first and foremost expect the European Union to preserve peace, reinforce international security and promote international cooperation. “As monetary policymakers,” Governor Holzmann argued, “the best contribution to social peace that we can make to fulfill young Europeans’ expectations is to abide by our price stability mandate.”