But other forces may increasingly push in the opposite direction and contain the risk of second-round effects, as what I have dubbed “bad” inflation – the inflation resulting from supply shocks – compresses real incomes.
The reduction in real wages and purchasing power is weakening domestic demand, with several leading indicators already pointing to a likely contraction in economic activity, starting from the last quarter of this year. The euro area PMI composite output index fell in October to its lowest level since November 2020, [11] with forward-looking indicators of activity particularly weak.