a shifting macroeconomic environment yet, these large - scale policy interventions coincided with fundamental structural changes in the global economy. as the recovery of supply was held back by persistent disruptions to global supply chains, labour shortages and social distancing measures, demand started to outpace supply, putting upward pressure on prices. inflationary pressures were then reinforced by russia ’ s invasion of ukraine, which led to a surge in energy and food prices. over time, inflation broadened substantially, creeping into most goods and services, and pushing up underlying inflation to historically high levels, with no clear signs of reversal so far ( slide 3 ). ecb staff analysis suggests that both demand and supply have made a significant and broadly even contribution to the recent rise in underlying inflation in the euro area ( slide 4 ). these price pressures are unlikely to dissipate quickly. even if the deterioration in the euro area ’ s terms of trade and the significant loss in purchasing power will dampen private consumption and investment, the current macroeconomic environment differs from that before the pandemic in at least four key aspects. first, excess savings accumulated since the start of the pandemic remain significant in both nominal and real terms ( slide 5, left - hand side ). second, due to supply constraints, firms in the manufacturing sector continue to have full order books with a backlog of more than five months ( slide 5, right - hand side ). third, euro area firms continue to add new jobs, and unemployment rates remain at record low levels despite elevated risks of a technical recession in the winter. finally, there is increasing evidence that the pandemic and the energy crisis may have more permanent negative effects on current and future potential output, implying that inflationary pressures may persist if demand does not slow down accordingly. potential output growth may be constrained through different channels. the first is labour scarcity. a significant share of euro area firms continue to identify labour shortages as a major factor limiting production in manufacturing and the services sector ( slide 6, left - hand side ). research shows that the pandemic has led to lower labour participation in sectors where it is hard to work from home [ 6 ], and that those sectors are likely to experience some scarring, facing a loss in their trend output ( slide 6, right - hand side ). [ 7 ] this development reinforces pre - existing trends, driven primarily by demographic change. the second channel works through the capital stock and productivity growth. the energy crisis is

and highest income quintiles increased to 2. 2 percentage points in october 2022, its highest level since 2006 ( slide 9, left - hand chart ). this inflation gap between poorer and richer households is mainly driven by relative price increases for energy and food ( slide 9, right - hand chart ). monetary policy can do little about such relative price changes. even tighter monetary policy, leading to lower headline inflation, would not have prevented such uneven effects across households. only governments have the mandate and tools to address distributional issues. as regards the second type of measure, governments must address the underlying sources of the supplyside shocks that are likely to affect the structure of the economy more persistently. this requires public investment and decisive structural reforms that foster potential growth and, at the same time, help to dampen inflationary pressure over the medium term by reducing supply - side constraints. in this regard, the next generation eu programme offers a historic opportunity. [ 12 ] disbursements under the recovery and resilience facility ( rrf ) are expected to stay at high levels over the coming years. a swift and efficient implementation of the key investment projects and reforms envisaged in the national plans under the rrf is key for boosting investment and potential growth. so far, governments have often not followed the above prescriptions. they focussed mainly on a combination of untargeted measures, fossil fuel subsidies and government consumption to soothe the damages inflicted by the energy crisis. only a small share of the temporary fiscal measures implemented to alleviate the burden of rising energy prices target low - income households ( slide 10, left - hand side ). rather than cutting taxes for vulnerable households or providing transfers to those in need, governments have mostly resorted to broad - based tax cuts or subsidies, or to outright energy price caps. in addition, many measures support short - run fossil fuel consumption, thereby working against efforts to move away from fossil energy sources. in terms of their budgetary impact, only 1 % of the total measures contribute directly to the green transition. tax cuts and subsidies for fossil fuels, unless properly designed, incentivise neither the efficient use of energy nor investment in energy - saving technology. moreover, public investment will remain subdued this year and next. it is only expected to pick up in 2024 and 2025, mainly reflecting increased defence spending, which helps to support our security, but has a low contribution to potential growth ( slide 10, right - hand side )