What explains recent errors in the inflation projections of Eurosystem and ECB staff?

This box reviews the large errors made throughout 2021 and the first quarter of 2022 in Eurosystem and ECB staff inflation projections. Errors in conditioning assumptions, notably due to unexpected energy price increases, are estimated to explain around three-quarters of these errors. Such errors are inherent to the nature of Eurosystem and ECB staff projections, which are conditioned on a set of assumptions, mainly stemming from market-based information including on energy prices. Supply bottlenecks being more persistent than expected, the recovery in economic activity being swifter than predicted, and the transmission of the energy price shock possibly being stronger than usual also played a role, and these factors likely explain a large portion of the errors in projecting HICP inflation excluding energy and food. A comparison with peer institutions shows that large inflation errors were widespread, not only across forecasters but also across economies. This emphasises the predominant role of global factors in a context of steep commodity price increases, especially for energy. While Eurosystem and ECB staff take all available information into account and continuously refine the models used in their projections, inflation developments are likely to remain challenging to forecast in the near term due to the volatile price movements in energy commodities, the uncertainty caused by the war in Ukraine and reopening effects following the removal of pandemic-related restrictions. In this context, complementing the Eurosystem and ECB staff baseline projections with scenario and sensitivity analyses help provide a richer representation of the inflation outlook. JEL Classification: C53, E37, E58