Crucially, however, our ability to lengthen the medium-term horizon in this way depends on our objective remaining credible – and especially when the economy is hit by repeated oneside shocks and inflation deviates from our objective systematically in the same direction for a prolonged period. In such circumstances, the inflation process can become subject to short-term spells of inertial drift 3.
But if agents remain confident that below but close 2% remains the orientation of policy, they will not factor in past developments into their forward-looking price- and wage-setting behaviour, and inflation will return to our objective in the steady state.