When answering these questions, it is useful to subdivide the inflation process into three factors, comprising: first, economic slack, measured by the output or unemployment gaps, for instance; second, a range of other domestic and global macroeconomic shocks that drive a wedge between that relationship, affecting either production costs or price mark-ups; and, third, inflation expectations, which feature as the – possibly time-varying – trend in this statistical relationship. Following this logic, summarised by the well-known Phillips curve, recent research has explored whether the disconnect between inflation and the economic recovery may have derived from a genuine change in the causal relationship between economic slack and inflation, or from a prevalence of disinflationary pressures originating from other sources, including potential shocks and a downward shift of inflation expectations, which could have more than offset the typical impact of slack on inflation. The relationship between inflation and economic slack With regard to the first dimension, the bulk of the evidence confirms that domestic cyclical conditions have played an important role in explaining disinflationary pressures. Domestic factors have been found to be the main driver of disinflation between 2012 and 2014, and have continued to weigh on inflation thereafter. Measures of economic slack, in particular, have proven informative in forecasting inflation outcomes. Moreover, Eurosystem staff calculations, using various combinations of economic activity indicators and inflation expectation measures, have found that more than 80% of the standard estimated Phillips-curve specifications confirm a significant relationship also during the more recent period of disinflation.

Overall, our monetary policy measures are effective, and are gradually bringing inflation back to a path that is consistent with price stability over the medium term. This takes time, and it requires determination and patience. 1 I would like to thank Sören Radde and Fédéric Holm-Hadulla for their contributions to this speech. 2 See Ciccarelli, M. and Osbat, C. (eds. ), “Low inflation in the euro area: Causes and consequences”, Occasional  Paper Series, No 181, European Central Bank, Frankfurt am Main, January 2017, and the references cited therein. 3 At the level of individual euro area countries, a large proportion of specifications also displays a significant  Phillips curve slope, albeit with the exception of some euro area countries, probably on account of confounding factors related to global exposures and persistent structural changes. However, the finding that domestic cyclical conditions were an important driver of the disinflationary period from 2012 to 2014 is common to all countries. 4 Theoretically, the impact of population ageing on inflation may go both ways, but the bulk of the literature points  to a negative effect. See e.g. Bullard, J., Garriga, C., and Waller, C.J., “Demographics, Redistribution, and Optimal Inflation”, Federal Reserve Bank of St. Louis Review, Vol. 94, No 6, 2012; Shirakawa, M., “Demographic Changes and Macroeconomic Performance: Japanese Experiences”, Opening Remark at BOJ-IMES Conference, Bank of Japan, 2012; Carvalho, C., Ferrero, A. and Nechio, F., “Demographics and Real Interest Rates: Inspecting the Mechanism”, European Economic Review, North-Holland, April 2016.