Over 2017 as a whole, euro area inflation should reach 1.5%, against just 0.2% in 2016; for the coming years, we foresee inflation at 1.2% in 2018 and at 1.5% in 2019 – with a change in composition: less “energy” inflation, more underlying inflation. This represents a first success: our monetary policy measures have succeeded in warding off the risk of deflation which was still threatening the euro area last year – we mustn’t forget that inflation was declining, standing at 0.2% in April 2016. That said, despite the progress made towards our target, it is still too slow. The underlying trend in inflation is still not strong enough to support prices in the medium run. Underlying inflation, excluding energy and food, has admittedly increased – rising from 0.8% in the first quarter of 2017 to 1.2% in July and August 2017 – but it still remains at subdued levels, despite the strong 1/4  BIS central bankers' speeches  recovery in activity and employment. A significant factor is the relatively low nominal wage growth. Among the cyclical factors, I would like to mention two in particular: first, persistent slack in the labour market – the unemployment rate has fallen sharply in the euro area, to stand at 9.1% in July 2017, but it is still too high; [slide] second, backward looking wage bargaining, which means that low past inflation is feeding through to wages today. The influence of these two causes should nevertheless diminish with the recovery in economic growth and inflation.
Where the recovery in demand outstrips supply, it is entirely possible that we will witness temporary periods of excess demand, or what more commonly we might describe as “bottlenecks”. This is especially likely within particular sectors, given the uneven nature of the recovery. In a “normal” recovery, signs that cost pressures were increasing and firms were experiencing capacity constraints, would be a clear warning sign that demand was returning close to potential supply. However, this is not necessarily the case now, because we expect both demand and supply to continue to recover towards their pre-pandemic levels. Consistent with this, we are seeing rebounds and normalisation of some commodity prices, though oil prices are now if anything rising above their averages of the last 5 or so years, while, for instance, in the US, lumber prices having risen sharply, are now retracting a sizeable part of that rise. There are plenty of stories of supply chain constraints on commodities and transport bottlenecks, much of which ought to be temporary. There are shortages of some products, notably semi-conductors, some agricultural commodities, and some end user products such as fitness equipment and home and garden furniture – the stuff we take solace in during a time of lockdown. Many of the factors behind these constraints are global in nature, reflecting shortages of products and transport capacity, set against the strength of the recovery to date and expectations of strong future growth.