Other factors will add to the inflationary pressures in the medium to long run. Without elaborating too long on them today, I want to mention in particular population ageing and climate change. The ageing of the population will lead to a significant increase in public spending, for retirement pensions and health expenditure. At the same time, the growth in public indebtedness during the past twenty years will require an adjustment at some point. Both issues will lead to a mix of economic policy decisions and there may be a conflict between firms and employees about the final burden sharing, with risks of a wage-inflation spiral. Climate change could also have both a direct impact on prices, through disruptions in production, and an indirect impact, through policy measures to curb down carbon dioxide emissions. Climate change, through unusual weather outcome – temperature, rain or unusual seasonality – or disasters, would disturb climate sensitive productions such as food products or electricity (e.g. hydroelectric energy). Scarcity of these products would then lead to temporary overshooting in their prices. Measures to curb down carbon dioxide emissions will have a direct impact on prices through increases of indirect taxes and an indirect impact through the necessary adjustment of the production process. This adjustment will involve heightened tensions on production capacities, as part of the equipment stock will have to be discarded due to changing regulations or due to increases in its operating costs with higher taxes. Some temporary impact on inflation may therefore be expected during this process.
On the demand side, should emerging countries decouple to a large extend from the United States, their contributions would then be sufficient to maintain a significant pace of commodity prices growth. On the supply side, unexpected climate or geopolitical disruptions may lead to shocks on production, as in the past few years. On top of both factors, in the current context of raising inflation and troubled financial markets, commodities attract a growing part of investment, speeding up sometimes rather artificially their price increases. Second, the triggering of possible second round effects is a well known source of concern for the Governing Council of the ECB. The common desire of firms and households to offset  BIS Review 32/2008  1  profit margin and purchasing power losses stemming from inflationary shocks may lead to a wage-inflation spiral, ending in deteriorated output prospects and welfare losses to all parties. One should however note that nothing significant has materialised at this juncture. On the contrary, remunerations have remained well in line with productivity gains with, to take an example, reference wages increasing by 0.3% in France during the fourth quarter of last year. From this point of view, protracted shocks to food and commodity prices put the anchoring of inflation expectations and the credibility of monetary policy to the test. The recent upward trend in European household and market expectations may be of some concern.