Furthermore, as my fellow panelist Prof. Baumeister has highlighted, it is important to identify the original source behind the energy price movements in real time. This may become more challenging as the green transition involves a wide range of sectors and products. To help us navigate we might need new analytical tools and new models. Second: Central banks are not unfamiliar with fluctuations in energy prices, but should the frequency and persistence of supply shocks increase ahead we may more often be faced with the challenging short-term trade-off between stabilising inflation and promoting high and stable employment. Deciding on the right timing and dosage of monetary policy will be crucial. The appropriate response of monetary policy to energy prices depends on the source and nature of the disturbances and their expected persistence. It also depends on whether energy price shocks fuel inflation via second-round effects on other prices and wages, for instance through inflation expectations. Failing to respond to secondround effects, we may risk persistent overshoots of our inflation target and ultimately, a deanchoring of inflation expectations. On the other hand, wrongly interpreting temporary movements in energy prices as persistent, we could have larger output losses in the short term and may even increase inflation volatility. Moreover, changes in relative prices, for instance due to higher carbon prices, are effective signals that push the transition in the right direction. An appropriately flexible and forward-looking monetary policy would help those necessary changes in relative prices to feed through.
We are already seeing that technology developed in the petroleum sector serves as a springboard for jobs in the green sector. Turning to my next topic, how are the structural changes in energy markets shaping the outlook for energy prices and inflation? On this, I will be humble and say, that predicting the level of energy prices in the years ahead is difficult. As we have already heard, different aspects of the green transition will affect prices differently, and possibly, with opposite signs. Outcomes will depend on technological developments, the supply of raw materials and minerals and on political decisions related to climate and energy security. In the short to medium term, we should be prepared for a potentially higher frequency of negative, and possibly, more persistent supply-side shocks originating in the energy market. [1] With an increasing share of intermittent renewables in the energy mix and insufficient energy storage systems to act as balancing mechanisms, supply could become more unpredictable. Coupled with low short-run demand elasticities, shortrun fluctuations in supply could potentially trigger large price movements, reinforcing a well-documented characteristic of energy markets. Turning to how movements in energy prices feed into inflation. Although household energy costs make up a fairly small share of the CPI basket, as we all witnessed last year, large movements in energy prices can have a material impact on headline inflation. Energy price changes also have an indirect effect through firms’ input costs.