According to our projections, real GDP is expected to remain below its pre-pandemic path over the projection horizon, whereas the labour market is expected to remain resilient. [11] However, the relative contributions of supply and demand conditions are likely to change over time. In particular, the release of pent-up demand largely explains the recent contribution of demand to inflation. This is different from a cyclical upswing that “feeds on itself”[12], or a sustained increase in consumption as seen in the United States as a result of a highly expansionary fiscal policy and rapidly rising wages (Chart 4, panel a). That is why, in the euro area, the demand-driven contribution to core inflation has emerged more slowly over time (Chart 4, panel b). But forward-looking indicators point to a significant weakening in demand, which suggests that its contribution is likely to fade out (Chart 5). Chart 4 Evolution of private consumption and demand-driven contributions to core inflation in the euro area and the United States (percentage points contributions)  Sources: Panel a): Eurostat, FRED and ECB staff calculations. Panel b): FRSF/Adam Shapiro, Eurostat and ECB staff calculations. Notes: Panel a): the latest observation is for the third quarter of 2022, except for euro area household and non-profit institutions serving households (NPISH) final consumption expenditure for which the latest observation is for the second quarter of 2022.
During most of the 1970s, there was a darkening cloud over the perceived will and ability of the Fed to take action to reverse the rise in inflation, in the face of substantial political aversion to the perceived costs of disinflation. Memoirs of executive branch officials for the decades following the Treasury Accord are replete with references to attempts to influence the decisions of the FOMC. In 1978, Congress passed The Humphrey Hawkins Act which gave the Fed its present mandate of “maximum employment, stable prices, and moderate long-term interest rates,” and this legislation established a more systematic schedule of reporting and testifying to the Congress. This is the mandate that governs the Fed today. Over this period of broad continuity in the legal framework of the Fed, U.S. monetary policy had its good moments and its less distinguished moments. The degree of legal independence we enjoyed at the beginning of the 1970s was not materially different from what existed at the end of the decade. The institutional framework for formal decision making was the same. The formal mandate was modified in 1978 with the addition of the explicit reference to price stability, but this change cannot explain the substantial difference in monetary policy outcomes over the last two and a half decades. An institutional framework that was not sufficient by itself to produce a consistent record of good  monetary policy decisions over the decade of the 1970s can’t be credited fully for the substantial improvements in monetary policy and economic outcomes that followed.