Core inflation is running at about 2 per cent, but it is also being boosted by exchange-rate effects and a couple of other one-time factors. Because monetary policy takes up to two years to have its full effect on inflation, responding to every fluctuation in prices would be counter-productive. Therefore, we generally look through inflation variations that, in our judgement, will prove temporary.
The European stability and growth pact as well as the new “debt brake” (“Schuldenbremse”) bill in Germany have set out necessary and passable consolidation paths in order to reverse the persistent trend towards ballooning debt and prevent further delays in the structural consolidation of public finances.