near - term inflation expectations are quite elevated. in the ces, the medium - term inflation expectations of households also remain well below the near - term inflation expectations. across all available sources, macroeconomic expectations ( and prospects at the individual level ) suggest a high degree of concern about a potential economic slowdown, a general recognition that supply shocks will generate both near - term inflation surges and a decline in the economic outlook, which in turn will constrain the persistence of inflation. this profile is consistent with a profile in which market participants, experts and households broadly understand ( albeit to varying degrees ) that supply shocks and temporary factors have pushed inflation up to the current high levels but that these factors are expected to fade over time, reinforced by the understanding that monetary policy actions ( as captured by the expectations of substantial rate hikes in the coming months ) will ensure the return of inflation to target. in terms of the feedback loop from inflation expectations to nominal and real dynamics, it is important to appreciate that, for any given nominal yield curve, if high near - time inflation expectations are accompanied by expectations of a deteriorated macroeconomic outlook and significant uncertainty then the inflation cycle is less likely to be amplified through an endogenous increase in consumption, investment and credit compared to an alternative scenario in which high near - term inflation expectations are accompanied by macroeconomic optimism. put differently, cost - push inflation shocks are less likely to give rise to a pro - cyclical real interest rate channel compared to demand - driven inflation shocks. at the same time, market - based indicators of inflation risk and the right - tail of responses in the expert and household surveys also clearly show that the risk of inflation not returning to target in a timely manner is priced by market participants and feared by some survey respondents. as indicated in our recent monetary policy statements, such above - target revisions to some indicators of longer - term inflation expectations warrant close monitoring. in tracking these right - tail indicators, two conjectures are especially relevant. in one direction, more attentive traders, experts and individuals may identify more quickly a persistent shift in inflation dynamics, while inattentive participants adjust more slowly. under such scenarios, as highlighted in the pioneering work of ricardo reis, right - tail measures will be leading indicators for a generalised revision in long - term inflation expectations. [ 2 ] however, under other scenarios, the right tail might be populated by those who over - react to high spot inflation readings and mis - perceive as permanent what turns out

rates at extended maturities, if they are not explicitly renewed. in spite of the separation principle, however, some commentators have raised concerns that the large amount of liquidity currently available to euro area banks will turn into broad money and credit, and eventually into a source of inflationary pressure. non - standard measures have indeed resulted in a sizable expansion of the ecb balance sheet. in the more of four years between mid - 2007 and end 2011, the eurosystem balance sheet relating to monetary policy assets6 grew from 438 eur billion euros to a temporary peak on 25 june 2010 of 985 billion euros, and has decreased since then to currently 923 billion euros. this corresponds to a rate of growth of close to 110 %. however, it should also be noted that the rate of growth of total eurosystem balance sheet between end - november 2007 and end - november 2011 was 88 %, whereas for the federal reserve ’ s was 219 % and for the bank of england was 191 %. central bank reserves are held by banks and are not part of money held by the non - financial sector, hence not, per se, an inflationary type of liquidity. there is no acceptable theory linking in a necessary way the monetary base created by central banks to inflation. nevertheless, it is argued by some that financial institutions would be free to instantly transform their loans from the central bank into credit to the non - financial sector. this fits into the old theoretical view about the credit multiplier according to which the sequence of money creation goes from the primary liquidity created by central banks to total money supply created by banks via their credit decisions. in reality the sequence works more in the opposite direction with banks taking first their credit decisions and then looking for the necessary funding and reserves of central bank money. as claudio borio and disyatat from the bis put it : “ in fact, the level of reserves hardly figures in banks ’ lending decisions. the amount of credit outstanding is determined by banks ’ willingness to supply loans, based on perceived risk - return trade - offs and by the demand for those loans. ” 7 in modern banking sectors, credit decisions precede the availability of reserves in the central bank. as charles goodhart pointedly argued, it would be more appropriate talking about a “ credit divisor ” than about a “ credit multiplier ”. 8 one can obviously monitor developments in monetary and credit aggregates to check if the concern regarding inflationary risks is justified.