ECB Preview: Nearing Point of No Return for Second Hike

From thinicemacroeconomics.substack.com

Oversimplifying, I would frame the ECB response to this supply shock as follows. • the first hike is a signal: the central bank tells the private sector “I’ve got this”, which is meant to be both reassuring that inflation won’t get out of hand, and a warning to wage and price setters. The aim here is to prevent unanchoring of inflation expectations. In an era of recurring supply shocks and with memories of the post-covid inflation still fresh, this signal must be sent reasonably early • the second hike depends on (the strength of) indirect effects and hence on the breadth of inflation: whether and how ... (full story)