In addition, slightly stronger wage growth is expected, in the context of a robust labour market, higher minimum wages in some countries and the delayed effects of past high inflation rates. These factors more than offset the negative impact on inflation of the weaker growth outlook. In consequence, in the latest ECB staff projections, inflation forecasts have been revised up significantly throughout the projection horizon. As the present inflation determinants gradually disappear, and the normalisation of our monetary policy passes through to the economy and to prices, inflation will decline. The ECB’s September projections place inflation at 8.1% in 2022, 5.5% in 2023 and 2.3% in 2024, an upward revision of 1.3 pp, 2 pp and 0.2 pp, respectively, on the June projections. These macroeconomic projections are surrounded by great uncertainty, with downside risks for activity and upside risks for inflation In the near term, inflation depends to a great extent on developments in energy commodity prices, specifically gas and electricity prices. In addition, possible interruptions in energy supplies and harsh winter weather are both risks to the outlook for the euro area, as they could bring about further increases in energy prices and more severe production cuts than expected in the baseline scenario. To reflect these risks, the ECB’s latest projections once again include a downside scenario that envisages slightly lower growth in 2022 and, in particular, a contraction in GDP of 0.9% in 2023, while maintaining the expected increase of 1.9% in 2024.

However, the cut-off of Russian gas is a major determinant of mediumterm inflation reaching such high levels under that scenario. In other words, the upside risks to the inflation projected under the baseline scenario reinforced the need to accelerate the interest rate rises. Looking ahead, we will continue our monetary policy normalisation, the pace and scale of which will depend on the materialisation of the risks to our medium-term inflation target At least two risks are and will remain central to our monetary policy deliberations and decisions. First, a potential de-anchoring of medium and long-term inflation expectations above the 2% level. The materialisation of this risk would be the worst-case scenario, since it would affect the price- and wage-related decisions that firms and households make in the present. This would cause even higher and more persistent inflation, requiring still more forceful monetary policy measures that would harm activity and employment. The information available to date shows no indications of expectations becoming deanchored. However, there are some early signs that need to be watched. The most recent surveys of professional forecasters put inflation in 2024 at, or just over, 2%. The latest data from inflation-linked derivatives markets (adjusting for risk premia) suggest likewise. However, the most recent round of the ECB’s monthly Consumer Expectations Survey (CES), published in early September, puts the median inflation expectation three years ahead at 3%, up from just over 2% at the start of the year. We will be extremely vigilant of these indicators in the coming months.