ECB-President Christine Lagarde has announced a comprehensive review of the monetary policy strategy. The last strategy review has taken place 17 years ago. The current review will include a survey of different social groups, like firms and households. In doing so, the ECB acknowleges that communication with a broader public beyond financial market specialists is important and that it has not properly addressed the public in the past. Monetary policy, as an "unelected power" (Paul Tucker) without democratic legitimation, must face up to public debate in a special way, so that its actions can be comprehended.

Broadening the communication

Communication and accountability are key pillars of the inflation targeting framework which was originally proposed by Lars E. O. Svensson (Svensson, 2010). In this framework communication with the public is a policy tool for managing inflation expectations, since expectations contribute to future inflation dynamics. This is reflected in the ECB’s forward guidance, which aims at stabilizing inflation expectations by communicating the future path of monetary policy interest rates.

However, the ECB communication is often limited to communiques with the European Parliament, the European Commission and through press conferences and speeches to high-level audiences. It is therefore ques-​​tionable whether this communication reaches the general public, including companies that set prices and wages. This starts with the technical language (PSPP, LTRO, TLTRO, Forward Guidance etc.), which is hardly understood outside the finance and research community. Moreover, the different social groups‘ inflation expectations differ a lot from financial market experts‘ forecasts, on which the ECB relies.

The cost of living varies between social groups

That is because the costs of living of the different social groups differ from the development of the costs of living from the representative household, from which the consumer price index is calculated. Poorer households, for example, are more affected by price increases of rent and food than richer households, because rent and food make up a larger part of their consumption basket. In addition to that, goods with decreasing prices, like telecommunication, make up a smaller part of their consumption basket compared to richer households. Studies for the US find, for example, that poorer households are much more affected by increases in gasoline prices and that older households are more affected by increases in health care expenditures (Hobijn/Lagakos, 2003).