Given the nature of the recent rise in inflation, the first question we should ask ourselves is how our monetary policy should respond to it. In July 2021, the ECB adopted a new monetary policy strategy, the cornerstone of which is a symmetric inflation target of 2% in the medium term. The aim of the ECB is therefore not to stabilise current, observed inflation, but to stabilise inflation over the medium run. This medium-term orientation responds to two considerations. First, monetary policy affects inflation with variable lags. The transmission mechanism of monetary policy operates first by affecting banks’, firms’ and households’ financing conditions. This, in turn, affects credit, investment, and consumption decisions. The resulting changes in aggregate demand exert pressure on firms’ production needs, thus lowering their demand for labour and other inputs, and hence on production costs, and will end up affecting prices. This process however takes time. Empirical studies typically show that monetary policy decisions have their maximum effect on inflation after one-and–a-half to two years. Therefore, attempting to stabilise observed inflation at all times is a futile, and probably counterproductive task, as it increases the volatility of macroeconomic aggregates. Second, the optimal response of monetary policy depends on the nature of the shocks that cause inflation to rise. For instance, an energy shock is typically considered as a supply or “cost-push” shock, as it increases production costs for firms.

Much of these data were granular enough to differentiate economic effects across the income, sector and geographic distributions. 10 The fourth and final set of issues involves the interaction of pre-pandemic structural trends with cyclical developments. The recent global shocks have deep implications for previously identified structural trends such as secular stagnation and the shifting relationship between technology and jobs. Workers’ increased reliance on remote solutions during the pandemic probably accelerated the digitization of tasks, which in turn has broader implications for income distribution and productivity growth, as well as the property market. In contrast, other structural trends may have been somewhat arrested by recent events; for example, pandemic and geopolitical disruptions injected fresh fragmentation impulses to the world economy and possible unmoored economies from their previous low inflation equilibria. 11 These four issues—the complex nature of shocks, along with the appropriate policy response, labour market effects and interactions with pre-pandemic structural trends— are key pivots that confront the global economy. And they will each have some hearing at this year’s Forum. Prof Viral Archarya started us off last evening with an astute and realistic assessment of the global landscape before us and the vulnerabilities that lurk in financial market adjustments, drawing in insights from his research. 12 For the Policy Note session on “Labour Market Policies after COVID-19”, our speakers are Professor Eric French and Professor John Haltiwanger, two eminent labour economists whose work central bankers have always paid close attention to.