On both theoretical and empirical grounds, the ultimately monetary nature of inflation cannot be challenged. While other factors can influence price developments at shorter horizons, this does not call into question the underlying long-term relationship between money and prices. 8 Furthermore, the empirical evidence clearly points to monetary trends leading inflationary trends, thus giving support for a monetary analysis in a forward-looking monetary policy.
The analysis of monetary aggregates allows the ECB to identify the longer-term and more persistent trends in inflation. This is the main reason for the monetary pillar in our monetary policy framework. The monetary pillar should not be confused with a “financial stability pillar”. Monetary analysis is not conducted with the principal goal of detecting financial imbalances.