We face a more protracted economic slowdown than previously anticipated and see persistent downside risks to the growth outlook. Second, inflation continues to fall short of expectations. Headline inflation remains well below our medium-term aim, while core inflation has been hovering around 1% for an extended period of time.
This requires a careful examination since that relationship – the Phillips curve – is the traditional cornerstone of the transmission mechanism giving central banks control of inflation. Inflation dynamics since the Great Recession have shown signs of instability that have led to a sequence of systematic forecast errors.