European Central Bank chief economist Mr Otmar Issing today said rising inflation expectations are a worry that would have to be dealt with.
"I am very concerned about the increase in inflation expectations and we have to deal with them," Mr Issing said in a panel discussion at a conference organised by the Center for Financial Studies.
The ECB is conducting a major study on inflation persistence, which he said has been "stubbornly above 2 per cent".
The ECB was strongly criticised by one ECB watcher, Mr Harald Uhlig from the Centre for Economic Policy Research in London, for failing to meet its goal of keeping inflation below 2 per cent over the past four years.
Mr Issing rebutted the charge, saying the ECB's success in keeping inflation at around 2 per cent was a tremendous achievement.
"If somebody six years ago would have said that you at the ECB would be criticised for keeping inflation at around 2 per cent and that this is a failure, I would have said I am looking forward to that failure," he said. Indirect taxes and administered prices accounted for 0.7 percentage point of price gains in the 2004 inflation forecast of the ECB.
However, the 2005 forecast does not include an estimate for these factors, Mr Issing said. This has become a major risk that could cause the ECB to miss its inflation target again, he said. ECB staff economists in June forecast inflation next year to fall in a range of 1.1 to 2.3 per cent, after 1.9 to 2.3 per cent this year.
The ECB left interest rates unchanged at 2 per cent this week and most analysts do not see it tightening credit until the latter part of this year or 2005.