Christine Lagarde: Hearing of the Committee on Economic and Monetary Affairs of the European Parliament

Why It Matters

The gap between measured and perceived inflation can distort consumer behavior, anchor expectations, and erode confidence in monetary policy, influencing the ECB’s future rate decisions. Bridging this gap is essential for sustaining price stability and the credibility of the euro area’s monetary framework.

Key Takeaways

• Inflation fell to 1.7% in January, near ECB target
• Perceived inflation exceeds measured rates by about 1.2 points
• Higher perception can boost saving, curb consumption, affect growth
• ECB kept key rates steady, emphasizing data‑dependent policy
• Financial‑literacy push aims to narrow perception gap

Pulse Analysis

The euro area’s inflation trajectory has shifted dramatically since the post‑pandemic surge, dropping from a 10.6% peak in October 2022 to 1.7% in January 2026. This rapid deceleration reflects aggressive monetary tightening, lower energy prices, and a modest easing of services inflation. While headline numbers suggest the ECB’s policy toolkit is working, the broader macro environment remains fragile, with lingering supply‑chain stresses, a stronger euro, and geopolitical uncertainties that could reignite price pressures if not carefully monitored.

A persistent divergence between actual inflation and public perception poses a subtle but potent risk to the ECB’s mandate. Surveys consistently show households estimating inflation roughly 1.2 percentage points higher than official HICP data, a bias driven by personal consumption patterns, especially food price volatility, and cognitive tendencies to overweight price increases. This misalignment can influence spending, savings, and wage‑setting behavior, potentially feeding back into inflation dynamics and complicating the central bank’s effort to anchor expectations at 2%. Moreover, perceived inflation shapes trust in the ECB; a credibility gap could undermine the effectiveness of future policy moves.

To address the perception gap, Lagarde outlined a three‑pronged approach: maintain price stability, enhance communication, and boost financial literacy. The ECB is refining its messaging, using digital channels like the "Espresso Economics" series to translate complex policy decisions into everyday language. Simultaneously, Europe is urged to invest in financial‑education initiatives that empower citizens to interpret price signals accurately. By aligning public expectations with measured outcomes, the ECB aims to reinforce its democratic legitimacy, sustain low inflation, and support a resilient euro‑area economy.