However, in the medium run, the challenge of climate change may lead to a significant improvement in technological progress, which will lead a minima to reduce energy consumption and carbon dioxide emissions for a given level of output but could also stimulate productivity growth. This inflationary impact highlighted before would then be offset both by downward pressures on energy prices and by productivity acceleration. *  * *  As we can see from this rapid review of risks factors to inflation in the short to the long run, there is a clear upward bias to risks regarding inflation, which has to be taken into account by economic policy. BIS Review 32/2008  3  It is thus all the more necessary to insure a proper degree of competition on product markets and a well-functioning price system, inducing changes in consumption or production patterns according to the relative scarcity of products. There are large margins of improvement with respect to product market competition both in emerging and advanced countries. In the euro area, the fulfilment of the Lisbon agenda objectives could have a significant offsetting impact. Higher employment rates and acceleration in productivity would lead to both less inflation and higher growth. The low current employment rates of the younger and older workers provide a wide acceleration margin for European growth. The potential catching-up of information technology use in the Euro area would lead to a substantial increase in productivity growth. Both evolutions would significantly reduce the inflation content of growth and help contain inflationary pressures.
What, in view of all this, is the appropriate policy response to the current inflation? Most of the overshoot relative to target in the latest CPI numbers – more than all of it, on some measures15 – reflects unusually strong inflation in goods prices. In all likelihood that will also be true of the larger overshoot we’re going to see towards the end of this year. And if this was only a story about global goods prices – and depending how confident you were in its transitory nature – I think the answer could well be “nothing”. There’s a clear parallel with changes in oil prices. In that case the most reasonable assumption is generally that the direct effect on inflation will be gone in a year or so, before monetary policy could do much about it. Subject to any “second-round” effects on wages, the orthodox view is therefore that policy should “look through” the immediate impact. (Note that this applies as much to falls as rises. In early 2015, for example, a big drop in the price of oil pushed headline UK inflation into negative territory, more than two percentage points below target. But, despite a lot of chatter at the time about “deflation”, the MPC did not ease policy because it thought the effect would probably be transitory.) The parallel isn’t exact. Oil only needs to go through a simple refining process before it appears in the local petrol station and the general pass-through to retail energy prices is therefore fairly immediate.