While the spread of more infectious virus mutations may decelerate the reabsorption of slack, a stronger and faster pass-through of elevated producer price inflation, a more protracted period of growth above the economy’s potential and a virtuous price-wage spiral have the potential to lift the euro area economy out of the pre-pandemic low growth, low inflation environment.
Even in this environment, fears of too high inflation are unfounded. In the most benign scenario, inflation in the euro area over the coming years would very likely remain well below the levels that threatened price stability, and hence welfare and social cohesion, in the 1970s and 1980s, largely thanks to the stability-orientated policy frameworks of independent central banks.