If so, this decrease will put downward pressure on core inflation, which was already running somewhat below our 2 percent objective when the downturn began in March. Moreover, as I have indicated previously, I judge that measures of longer-term inflation expectations were, when the downturn began, at the low end of a range that I consider consistent with our 2 percent inflation objective.
This is because domestic demand is linked more to services – which are more labour-intensive – while external demand is linked more to manufacturing, which is less labour-intensive.5 We are seeing that shield in action in the euro area today: the resilience of services is the key reason why employment has not yet been affected by the global manufacturing slowdown.6 But there is also a second benefit to strengthening the domestic economy, which is that it facilitates rebalancing.