These shocks – above all the increase in energy prices – are creating sizeable and persistent upward pressures on near-term inflation. But by hitting real incomes, confidence and ultimately domestic demand, these shocks could derail the post-pandemic recovery. In other words, the very shocks that have led to a surge in inflation are also depressing output.
As a result, the inflation path is starting from a much higher point but the medium-term inflation outlook is characterised by high uncertainty. In this situation, policy normalisation needs to be clearly defined, and how it is carried out needs to be carefully judged and calibrated.