Inflation targets are a central tool for monetary policy. The European Central Bank (ECB), like many central banks, aims for an inflation rate of 2%. This number is not random — it’s meant to represent a balance: avoiding both the economic drag of too-low inflation and the instability of too-high inflation.
But an inflation target only works if people believe in it. If consumers and businesses don’t expect the ECB to achieve its target, they may behave in ways that make the target harder to reach. That’s why credibility is so important: it helps anchor expectations and contributes to economic stability.
A new study by Winnie Coleman and Dieter Nautz, titled Asymmetric Inflation Target Credibility investigates how this credibility is shaped by real-world inflation developments. More specifically, the authors ask: Does public trust in the ECB’s 2% inflation target rise and fall depending on whether actual inflation is above or below the target? And if so, is the public’s response symmetric?
The answer, based on over 200,000 survey responses from German consumers collected between January 2019 and November 2024, is no — it isn’t symmetric. Coleman and Nautz designed a unique consumer survey to measure what they call “Inflation Target Credibility” (ITC): how much trust people have in the ECB’s ability to meet its stated goal. They then compared these credibility assessments with actual inflation rates in the euro area to test how deviations from the target influenced public trust.
Their findings are clear: the effect of inflation deviations on credibility is asymmetric. Deviations from the 2% target only decrease credibility if inflation is too high. But if inflation is too low, credibility does not improve if inflation increases to close the gap. This pattern holds across different inflation measures, model specifications, and demographic groups.
This asymmetry matters. The ECB communicates its 2% target as symmetric — treating both inflation above and below 2% as equally undesirable. But the public doesn’t see it that way. They react sharply to inflation rates above target but are rather indifferent when inflation is too low.
The implications for monetary policy are significant. For example, if inflation falls below target, the ECB may use tools to bring it back to 2%. But if consumers don’t view low inflation as a credibility problem in the first place, such measures may not have the intended effect. Coleman and Nautz conclude that the ECB should reconsider the assumption that the public acknowledges the symmetry of the inflation target. Instead, communication strategies and policy responses need to reflect that people dislike inflation only if it is too high.
On the authors
Winnie Coleman
PhD candidate at Freie Universität Berlin and the Berlin School of Economics. Her research focuses on macroeconomics, monetary policy, and time series econometrics, with a special interest in inflation expectations and inflation target credibility.
Dieter Nautz
Professor of Econometrics at Freie Universität Berlin. His research focuses on applied time series econometrics, empirical macroeconomics, and monetary policy.
