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.
However, most of the burden lies on central banks, as “inflation is always and everywhere a monetary phenomenon”. The current “two pillar” approach of the Governing Council with a crosschecking between the economic and the monetary analysis has, I believe, permitted us to deliver a stance of monetary policy which has been totally appropriate to the situation of the euro zone. The anchoring of inflation expectations at a level consistent with price stability, which is currently observed in the financial market, is therefore completely justified. The years to come will give to the central bankers the opportunity to demonstrate that these years of “great moderation” are not just the result of lucky circumstances but are largely due to an improved monetary policy framework. 4  BIS Review 32/2008