Inflation targeting under siege
Central banks are rethinking traditional inflation targeting as imported oil and food shocks keep core prices elevated — food shocks in particular have outsized, slow‑unwinding effects. Kansas City Fed’s Jeff Schmid warned inflation was near 3% pre‑Iran war, while the ECB is deploying new models to capture shifting inflation expectations as policymakers debate policy responses. (reuters.com; reuters.com; reuters.com)
Kansas City Fed President Jeffrey Schmid said U.S. inflation was running "near 3%" even before the Iran war’s oil shock and warned the Fed should not simply "look through" higher energy prices. (reuters.com) Schmid noted services inflation remains stronger than what would be consistent with a return to 2%, saying progress toward the Fed’s goal had stalled and that caution is warranted. (reuters.com) The European Central Bank said in a March 31 blog post it has developed models to convert irregular survey data into a smooth monthly curve of inflation expectations and to strip risk premia from market‑based measures. (reuters.com) Reuters coverage noted oil prices have nearly doubled since the start of the U.S. and Israeli war on Iran and that euro‑area inflation has surged past the ECB’s 2% target, heightening the policy trade‑off the new models aim to clarify. (reuters.com) Breakingviews columnist Jon Sindreu argued food‑price shocks unwind slowly because households cannot easily cut food consumption and because major Gulf producers account for roughly one‑third of global urea exports, linking fertilizer disruption to prolonged food inflation risks. (reuters.com) The Breakingviews analysis highlighted that slower‑moving food dynamics increase the chance that a one‑off energy shock becomes a more persistent price‑level problem, complicating standard inflation‑targeting frameworks. (reuters.com) The ECB’s modelling push echoes recent academic and ECB work using machine‑learning and non‑linear time‑series approaches to capture regime shifts and changing inflation sensitivities, and pairs survey‑smoothing with risk‑premium decomposition as a practical toolkit for assessing expectation shifts. (reuters.com) (cepr.org)
