Andreas Billmeier and Rebecca Christie / Nov 2026
Photo: Shutterstock
The European Central Bank’s 2027 leadership transition is happening as the inflation environment is turning unfavourable again. After the double-digit peak in 2022, headline inflation climbed back to 4 percent in October 2026, with energy prices up almost 21 percent while core inflation held at 2.5 percent. President Christine Lagarde told the ECB and Its Watchers conference in March that the ECB sees the economy “moving into a world of more frequent supply shocks”.
Whoever succeeds Lagarde next year will need to take charge of the bank’s inflation framework thinking, not just its implementation. The two leading candidates are eminently qualified to do just that: Klaas Knot, former president of the Dutch Central Bank, and Pablo Hernández de Cos, general manager of the Bank for International Settlements and former governor of the Bank of Spain.
ECB strategy reviews have changed both the inflation target and the bank’s reaction function, mostly in response to events. Over time, the target moved from “below 2 percent” via “below, but close to, 2 percent” to a symmetric 2 percent target. The 2021 review added a “forceful or persistent” response after inflation had undershot the target for the better part of a decade, and the 2025 review made that response symmetric after the 2021-23 inflation surge. For the next review, pencilled in for 2030, “supply shocks” increasingly look like a leading topic.
Whenever prices fluctuate faster than monetary policy takes effect, central banks face a trade-off between excusing deviations from target and adjusting the target itself to accommodate volatility. After all, credibility suffers if a too precise target is missed too often. For the ECB, there are two main questions: Is a specific point value still the best way to define the target? And should the inflation target continue to be calculated with using so-called headline inflation, which includes energy and food prices?
Depending on more in-depth research, one conclusion could be to explicitly target a wider range of inflation outcomes, creating a clearer distinction for when policy is and is not keeping prices in check. Put differently, rather than accepting 1.8 percent and 2.2 percent inflation as ‘two percent’ at a time of more pronounced supply shocks, the ECB could instead communicate a more explicitly acceptable error band – a ‘fat’ point target – to avoid a message of false precision. Or would it make sense to target a range without a focal point? The Swiss National Bank chose a zero to two percent target band in response to Switzerland’s accentuated exposure to another type of shock, namely the exchange rate and imported (dis)inflation. A band is not a free lunch, though: its edges can become the de facto target, and a ceiling breached too often costs as much credibility as a missed point.
Another conclusion could be that targeting headline Harmonised Index of Consumer Prices (HICP) inflation is no longer appropriate in an era of large and persistent supply shocks. For the ECB, that means finding an equilibrium between the best yardstick for measuring price stability success, and the ease of communicating the bank’s efforts. To look through big swings in volatile prices, it may make sense to consider some form of underlying inflation measure. One option is to target core HICP, excluding both energy and food, a measure used frequently in ECB communications and projections. However, food prices are more likely to move at the same time as core inflation as they also incorporate other elements of the economy, such as wages. As a result, they respond more to monetary policy than energy does. It may make sense to keep food in the target measure even if energy is treated separately. Even then, large energy shocks that spill over into wages would still call for action.
The target timeline is also a consideration – currently the ECB aims to reach its target “over the medium term”, a temporal buffer that some see as too elastic. It is worth keeping the ‘medium’ term, usually read as two to three years, as a practical way to preserve flexibility.
A secondary issue is HICP composition. Owner-occupied housing – the largest monthly expense for many households with a mortgage – is still missing from the HICP, unlike in many large advanced economies. Eurostat already publishes an index, and the next review should set a timeline to bring it in.
These choices are best made calmly in a review, not in the middle of a shock. Yet, it might make sense to commence the next review when the new president arrives in 2027, rather than waiting for 2030. Doing so would make it more forward-looking, and could set a precedent for regularly conducting reviews with each new change of leadership, as well as at other times when conditions warrant. In any case, assessing the target should become a standing part of every review. Inflation may be uncertain, but the ECB’s reflection can happen on a schedule.
