We expected that economies re-opening after the Covid restrictions and historically low unemployment would together restore healthy demand, and so it seemed reasonable to start scaling back monetary policy support while still keeping an eye on the lingering uncertainties hanging over from the pandemic. We decided that the pandemic emergency purchase programme (PEPP), through which the central bank provided support to the economy would end in March 2022. We also decided that any additional net purchases of securities by the central bank would be scaled down gradually over the year. These expectations were confounded though as the strict pandemic restrictions that China applied in winter 2021-2022 and Russia's invasion of Ukraine created new turmoil. The economy held up better than was at first feared, but inflation turned out to be much higher and more persistent than we expected. Inflation forecasts have time and again climbed higher, and by June there was no doubt that it was high time to speed up the normalisation of monetary policy. We ended net asset purchases and started to raise interest rates in July. When we started to sketch out the policy normalisation, the financial markets did not expect policy rates in the euro area to rise at all until 2024. Instead, we have now had to raise interest rates in the euro area faster than ever before in the history of the monetary union, by three percentage points in just six months. This may seem dramatic, but we must remember where we started.
The real interest rates in countries with higher inflation might be too low, while the real rates may be too high for countries with lower inflation. The common monetary policy then becomes too lax for some countries and too tight for others. There may also be possible concerns about the price competitiveness of individual countries in a monetary union if they experience persistently higher inflation at the country level. Finally, not every country in a monetary union will have identical economic and financial cycles, and this can then in turn cause differences between national inflation rates. These are wellknown challenges faced by monetary unions and the solution can only lie in the prudent use of other economic policies by the government – that is their structural and fiscal policies. Inflation and consumers When we talk about inflation, we usually mean how prices change for the average consumer. However, the actual impact that inflation has on individual households can vary quite a lot depending on their consumption patterns and the dynamics of the prices of different goods and services. Households that spend a larger proportion of their money on food are more exposed to changes in the price of food, while households that have higher spending on housing feel inflation bite harder when energy prices rise. Studies show that households on lower incomes are generally more exposed to the problems caused by high inflation than those with higher incomes.