Lagarde: Inflation at 1.7%, perception gap challenges public trust
ECB President Christine Lagarde stated that euro area inflation fell to 1.7 percent in January, down from 10.6 percent in October 2022. She highlighted a persistent gap between measured and perceived inflation, which affects economic decisions and public trust in institutions.
Euro area economy shows resilience, inflation nears target
ECB President Christine Lagarde presented an assessment of the euro area economy, which grew by an estimated 0.3 percent in the fourth quarter of last year and 1.5 percent for 2025, surpassing initial projections.
Domestic demand, particularly in services, drove this growth, with manufacturing remaining resilient and construction gaining momentum.
Future economic activity is expected to be supported by rising labour income from a robust labour market, alongside investments in defence, infrastructure, and digital technologies.
Lagarde reported that headline inflation in the euro area fell to 1.7 percent in January from 2.0 percent in December, while core inflation eased to 2.2 percent.
Real wages have recovered beyond early 2021 levels, and wage growth is projected to moderate to approximately 3 percent in the medium term.
The ECB maintains its expectation for inflation to stabilise at its 2 percent target in the medium term, which informed the decision to keep key interest rates unchanged.
Lagarde reaffirmed the Governing Council's data-dependent, meeting-by-meeting approach for future monetary policy decisions.
The stubborn gap in inflation perceptions
ECB President Lagarde addressed the divergence between actual and perceived inflation, noting it as a historical and global regularity.
The ECB's Consumer Expectations Survey, active since April 2020, shows perceived inflation in the euro area has, on average, surpassed measured inflation by 1.2 percentage points.
This gap is significant as it influences economic behaviour, shaping consumption, saving, and wage demands, while also impacting future inflation expectations and public trust in institutions.
Lagarde attributed this divergence to several factors: personal consumption patterns, a psychological tendency to focus on price increases, the broader economic environment, and varying levels of financial literacy.
She highlighted that frequently purchased items, like food, disproportionately influence perceptions, with food inflation having exceeded HICP inflation since mid-2022.
Bridging the perception chasm
Lagarde's emphasis on perceived inflation signals a strategic effort to rebuild public trust and anchor expectations more effectively.
Acknowledging this gap moves beyond mere statistics to address a genuine public concern, which is vital for the ECB's legitimacy.
However, relying on long-term solutions like financial education and communication may not swiftly close the divide, potentially leaving the central bank exposed to ongoing skepticism if price stability remains elusive.