This will lead to a build-up of domestic price pressures and ultimately pull underlying inflation up as remaining slack in the economy is gradually reabsorbed and the output gap narrows further. In turn, this will facilitate a durable return of inflation back to a level that is below, but close to, 2% over the medium term.
Today, an important element keeping underlying price pressures subdued is muted wage dynamics, which are shaped by many factors. At this stage, besides weak productivity developments, there is still a significant degree of labour market slack that keeps a lid on wage growth.