ECB speech on inflation, employment, supply shocks, and AI

Isabel Schnabel, Member of the Executive Board of the ECB, delivered a speech at the 2026 US Monetary Policy Forum discussing the challenges faced by central banks in the current economic environment.

She highlighted that post-pandemic inflation has strained societies, especially vulnerable groups, and that there is growing pressure on central banks to prioritize growth alongside inflation control. Schnabel argued that a dual mandate rarely results in different policy prescriptions compared to a single mandate focused on price stability.

She reviewed historical lessons from stagflation in the 1970s, which led to the independence of central banks with clear inflation mandates, and explained that in practice, both single and dual mandates often lead to similar policies, especially during demand fluctuations.

Schnabel emphasized that supply shocks are increasingly frequent and complicate monetary policy, requiring credibility and judgment rather than reliance solely on empirical relationships. She noted that recent adjustments by the Federal Reserve and ECB reflect this approach.

The speech also discussed the risks of supporting employment excessively, which can amplify inflationary pressures through second-round effects, especially in tight labor markets. She pointed out that supply-side constraints, demographic changes, and global trade shifts limit the effectiveness of demand-driven policies.

Looking ahead, Schnabel indicated that inflation in the euro area is expected to stabilize around 2% in the medium term, but risks remain from energy prices, tight labor markets, and rising domestic demand. She stressed the importance of anchoring inflation expectations and cautioned against overestimating the immediate impact of artificial intelligence (AI) on productivity and supply constraints.

She concluded that the ECB’s price stability mandate remains robust, emphasizing the need for vigilance in the face of geopolitical and macroeconomic risks, and that technological advancements like AI could eventually help expand supply and raise the natural rate of interest.