This report investigates how the EU should deal with shockflation - inflation unleashed by shocks to systemically significant prices such as energy and food. We argue that the ECB’s monetary policy is not an adequate instrument to deal with this kind of inflation. Therefore, the EU currently lacks adequate governance structures. The EU should develop a new inflation governance framework that targets shocks to systemically significant prices directly, before they are propagated through the economy. This document was provided/prepared by the Economic Governance and EMU Scrutiny Unit at the request of the ECON Committee.
Authors
- Published in
- Belgium
Table of Contents
- LIST OF ABBREVIATIONS 6
- LIST OF BOXES 7
- List of figures 7
- EXECUTIVE SUMMARY 8
- 1. Introduction 11
- 2. EU Inflation policy and the end of the Great Moderation 13
- 2.1. Two types of shockflation: The 1970s and today’s dynamics of sellers’ inflation 13
- 2.2. The ECB’s operational framework and the exceptional circumstances of the Great Moderation 15
- 2.3. The end of the Great Moderation 18
- 3. Making the EU ready for a world of shockflation 20
- 3.1. The limits of monetary policy 20
- 3.2. The return of sectoral policies 22
- 4. A new EU governance structure for inflation 25
- 4.1. Inflation governance within the EU Treaties 25
- 4.2. Price shock monitoring to anticipate supply disruptions 27
- 4.3. Avoiding shocks to systemically important sectors 28
- 4.4. Stopping proliferation and amplification and avoiding distributive conflict 30
- 5. Conclusion: Policy recommendations 32
- REFERENCES 33
