Setting out a policy strategy shift on Thursday, the European Central Bank left many questions unanswered but made one point abundantly clear: it would not follow its U.S. counterpart in targeting an average level of inflation.
The fact that it put distance between the two regimes in such a stark way reflects both the ECB's own struggles and the U.S. Federal Reserve's difficulty in communicating how average inflation-targeting actually works and impacts policy.Average inflation-targeting means making an explicit commitment to overshooting your target after missing it for a longer period. That would be a big no-no for inflation-wary Germany, the region's largest economy.
This may be seen as a victory for Bundesbank chief Jens Weidmann who has persistently rejected the idea of shooting for price growth above the target. Last year's inflation averaged just 0.3%, well below the ECB's 2% target, while in 2019, before the coronavirus pandemic, inflation was 1.2%. The bank's guidance on future policy moves is also imprecise, so moving to a Fed-style average would actually reduce that cherished flexibility.Targeting average inflation over a period is messy. It requires the central bank to define a time period and a specific inflation measure it looks at.
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