New ECB Research Calls for Rethinking Inflation Target to Protect the Poor
A new research paper set to be presented at the European Central Bank’s annual policy forum in Sintra calls for a rethink of how the ECB targets inflation—arguing the current strategy may unintentionally harm the most vulnerable in society.
Rather than continuing to chase headline inflation at 2%, the study suggests policymakers should concentrate on price changes in discretionary spending—items people choose to buy rather than need—claiming it would better protect workers with lower, more volatile incomes.
The authors say the existing framework leads to policy moves that disproportionately hit low-income earners. When interest rates rise, spending on non-essential goods and services drops faster than necessary, the paper claims. Since many low-wage workers are employed in those sectors, the result is a sharp decline in labor demand precisely where the workforce is most fragile.
“These workers are often living paycheck to paycheck, and their consumption habits are tightly linked to their income,” the authors note, warning that a blunt focus on overall inflation leads to deeper recessions for those least able to weather them.
By shifting the focus toward inflation in discretionary sectors, the ECB could encourage more stable consumption patterns, they argue—lessening the economic hit to service sectors and supporting employment among low-wage earners.
While such an approach would result in looser monetary policy overall, the authors contend it would improve economic efficiency by helping close the output gap—bringing real output closer to the economy’s potential.
The suggestion is unlikely to be adopted anytime soon. ECB officials have consistently resisted changing the 2% inflation target or altering the headline index they rely on, citing concerns that doing so could confuse markets and weaken credibility. Nonetheless, the paper is expected to spark debate at the central bank’s flagship research event next week.
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