Headlines
ECB should change inflation target, researchers to tell policymakers
Published by Global Banking & Finance Review®
Posted on June 27, 2025
2 min readLast updated: January 23, 2026
Global Banking & Finance Review®
Company
Published by Global Banking & Finance Review®
Posted on June 27, 2025
2 min readLast updated: January 23, 2026
Research suggests ECB shift focus from headline to discretionary inflation to protect low-income workers, impacting economic policy.
FRANKFURT (Reuters) -The ECB should abandon targeting headline inflation and focus instead on price growth in discretionary spending to protect the bloc's poorest, a paper to be presented to policymakers at the bank's preeminent research conference argued on Friday.
The ECB targets inflation at 2% and a soon-to-be-concluded review will not even discuss the definition of the target as policymakers have long argued that using a different measures, like underlying inflation, or figures incorporating housings costs, could sow confusion.
But the paper written for the ECB Forum on Central Banking in Sintra, Portugal next week argues that the current framework disproportionately hurts low income workers and leads to an inferior outcome for society.
The logic is that after an interest rate hike, discretionary spending contracts significantly more than needed, triggering a fall in labour demand in sectors producing discretionary goods and services.
"These sectors employ a larger share of low-income, hand-to-mouth workers, whose consumption is highly sensitive to income fluctuations," the paper agued.
Thus, the initial drop in discretionary spending cascades into a broader decline of overall demand, amplified by this impact on lower-income households.
"By targeting discretionary inflation, the central bank provides households with an incentive to smooth their discretionary spending; in turn, this ameliorates the negative employment effects on hand-to-mouth workers in discretionary industries," the paper argued.
Although this would lead to a more accommodative policy stance, stabilising discretionary spending inflation allows the economy to more effectively close the so-called output gap, or the difference between potential and actual output, the paper argued.
(Reporting by Balazs Koranyi; Editing by Toby Chopra)
The ECB targets an inflation rate of 2%.
Researchers suggest that the ECB should focus on price growth in discretionary spending.
Targeting discretionary inflation provides households with an incentive to smooth their discretionary spending, which can help mitigate negative employment effects on low-income workers.
An interest rate hike leads to a significant contraction in discretionary spending, triggering a fall in labor demand in sectors that employ low-income workers.
The output gap refers to the difference between actual economic output and potential output, which can be more effectively closed by stabilizing discretionary spending inflation.
Explore more articles in the Headlines category
