In fact, this episode has already served to show the benefits of some of the key elements recently added to the ECB reaction function. 3.1  An assessment of current inflation dynamics  Let me start by characterising the recent inflation dynamics. In a context in which the euro area economy is continuing to recover and the labour market is improving, headline inflation reached 5.1% in January, with core inflation at 2.3%. The surge in inflation is the result of a combination of factors. Prominent among these are the base effects stemming from the sharp drop in certain prices at the onset of the pandemic, supply bottlenecks, the steep rise in the prices of energy (especially electricity) and of other intermediate goods, and the impact of the recovery in demand on the price of some services. An illustration of the importance of these factors can be obtained by comparing price levels before and after the pandemic. The headline HICP increased by 4.7% between December 2021 and December 2019, while the core HICP increased by only 2.9% in this two-year period. The level of energy and food prices at the end of 2021 was 17.2% and 4.6%, respectively, above that observed in December 2019, while services and non-energy industrial goods increased by 3.1% and 2.3%, respectively. 8  In any case, inflation has surprised us consistently on the upside over the last few quarters, and also in the most recent months.
3  See Banco de España (2019) for a detailed discussion. 4  Andreeva and García-Posada (2019) estimate the impact of TLTROs on banks’ lending policies in the euro area. 4  Even though there is a broad consensus that these non-standard instruments have been effective in easing financing conditions and in supporting euro area inflation, economic growth and employment, their expansionary effects did not prevent inflation from remaining persistently below the ECB’s target for much of the last decade. This led the ECB to review its monetary policy strategy in order to search for ways to better fulfil its price stability mandate. 2 Main elements of the ECB’s new monetary policy strategy  The unanimous adoption in July 2021 of a new monetary policy strategy was an important achievement for the Eurosystem. This new strategy has drawn on an immense collective effort by the staff at the ECB and the Eurosystem national central banks over 18 months. Among the many new developments that this review has brought with it, let me now focus very briefly on three key aspects. For those interested, I provide a more comprehensive description of the new strategy in my article “The European Central Bank’s new monetary policy strategy”, The Euro YearBook 2022. First, the ECB has adopted a new medium-term inflation target of 2%. This target is symmetric in the sense that positive and negative deviations of inflation from the target are considered equally undesirable.