In an article called Falling inflation still 'doesn't feel real’ for households Christine Lagarde, President of the European Central Bank, told the European Parliament that inflation has largely been tamed. Yet many households across the euro area say they are still not feeling the relief in their day-to-day finances.
Reducing the gap between perceived and actual inflation could significantly benefit the euro area economy, European Central Bank President (ECB) Christine Lagarde said during a debate with EU lawmakers at the European Parliament on Thursday.
"We pay close attention to households' inflation perceptions, not only because these have an impact on economic activity and expectations, but also to ensure that we continue to earn the trust of the people we serve," Lagarde said during her speech.
In other words, it is suggested that the rise in prices of certain goods and services over the past few years is merely a matter of perception rather than reality.
However, what is often left unsaid — or buried in statistics — is that inflation is typically calculated year over year and compounds over time.
Let us start with a definition of inflation:
Inflation is an increase in the money supply (for example, when the ECB creates an additional trillion euros) that leads to a general rise in the prices of goods and services in the economy. This process does not occur simultaneously across all sectors. Those closest to the source of new money (for example, banks and financial institutions) tend to be affected differently, while those further away — particularly final consumers — experience the effects later, as price increases ripple through the economy. Raising prices is the effect and not the cause.
You can read more here about this topic.
Case study: The Netherlands
Let's grab the inflation numbers, as calculated with Consumer Price Index (CPI), for the last 15 years.
Indext=Indext−1×(1+inflation rate)
| Year | Inflation (%) | Compound Index (2010 = 100) |
| ---- | ------------- | --------------------------- |
| 2010 | 1.3% | 100.00 |
| 2011 | 2.3% | 102.30 |
| 2012 | 2.5% | 104.86 |
| 2013 | 2.5% | 107.48 |
| 2014 | 1.0% | 108.55 |
| 2015 | 0.6% | 109.20 |
| 2016 | 0.3% | 109.52 |
| 2017 | 1.4% | 111.05 |
| 2018 | 1.7% | 112.94 |
| 2019 | 2.6% | 115.87 |
| 2020 | 1.3% | 117.38 |
| 2021 | 2.7% | 120.55 |
| 2022 | 10.0% | 132.60 |
| 2023 | 3.8% | 137.64 |
| 2024 | 3.3% | 142.18 |
| 2025 | 3.3% | 146.87 |
What can we see?
- Prices in 2025 are approximately 46.9% higher than in 2010
- A product costing €100 in 2010 would cost about €146.87 in 2025 under this inflation path.
- The purchasing power of €100 fell to about €68.08 in 2010 terms!
And this is under the “ideal” conditions promoted by the ECB and the U.S. Federal Reserve — namely, that a 2% annual inflation rate is safe and healthy for the economy. As you can see from the figures above, the reality is more complex. In nominal terms, 2% inflation in 2011 is far from equivalent to 2% inflation in 2025, because inflation compounds over time.
So the next time a prominent financial figure like Christine Lagarde — former head of the International Monetary Fund, which approved a $57 billion loan to Argentina in 2019 — tells you that inflation is essentially under control, call out the BS.
This is the same official who once remarked that Greeks had “had a nice time” and that “it is payback time” during the Greek government-debt crisis in 2009, and who was found guilty of negligence for approving a €404 million payout to businessman Bernard Tapie in 2008.
