How adjustment takes place in turn has implications for euro area price stability. A fast price adjustment will cause inflation to fall steeply initially, but then agents will expect it to rise again. This ensures a firm anchoring of medium-term inflation expectations and does not affect perceptions of real interest rates going forward.
A slow employment adjustment, by contrast, will create more prolonged downward pressure on inflation, which is more likely to weigh on inflation expectations. This in turn can lead to higher expected real interest rates and exacerbates the effect of the shock, thus complicating the achievement of price stability at the euro area level.