There are two factors which could explain this apparent resilience. The first is the atypical buffers for consumption that households have available in the current environment. They are still benefiting from sizeable fiscal policy support to shield them from rising energy prices, amounting to around € billion in 2022 and 2023, and they still have around € billion in excess savings built up during the pandemic. [9] The second factor is the reduced sensitivity of the labour market to slowing growth, which is supporting labour income and households’ employment expectations. Faced with labour shortages, firms are responding to weaker demand first by hoarding labour – that is, by further reducing hours worked rather than by cutting jobs. And now, with energy prices falling and wages rising, household disposable incomes are set to increase. This was reflected – before the recent financial market tensions arose – in our projections for a stronger  recovery this year. So, for inflationary pressures to ease, it is important that our monetary policy works robustly in the restrictive direction. And that process is only starting to take effect now. The first leg of the monetary transmission process – from policy measures to financing and monetary conditions – is already having a substantial impact. The cost of borrowing is increasing steeply, and loan dynamics look to be contracting faster than during previous hiking cycles. Credit growth to firms has dropped markedly since the third quarter of last year.
Faced with a world that is changing faster than any of us could have imagined, we need to be both focused on our goal and robust in our strategy to achieve it. 1. Lagarde, C. (2022), “Monetary policy in a high inflation environment: commitment and clarity”, lecture organised by Eesti Pank and dedicated to Professor Ragnar Nurkse, Tallinn, 4 November. 2. This is visible, for example, if one compares the persistent and common component of inflation (PCCI) and the PCCI excluding energy. The former has been declining strongly since the summer of last year, whereas the PCCI excluding energy has only stabilised. 3. For an explanation on different measures of underlying inflation, see Ehrmann, M., Ferrucci, G., Lenza, M. and O’Brien, D. (2018), “Measures of underlying inflation for the euro area”, Economic Bulletin, Issue 4, ECB and ECB (2021), “Inflation measurement and its assessment in the ECB’s monetary policy strategy review” Occasional Paper Series, No 265, September. 4. Germany, France, Italy, Spain, the Netherlands, Austria and Greece. 5. Defined as those items in the core inflation basket for which wages account for more than 40% of input costs. 6. According to the labour force survey, the labour force has increased by 2.2 million since the start of last year and remains well above pre-pandemic levels, due to the rising participation of foreign workers (+1.3 million), women and older workers. 7. Employment growth in the public sector has accounted for about half of total employment growth since the end of 2019. 8.