firms are likely to hold higher inventories on a permanent basis and shorten their supply chains to relocate high - value services and r & d centres. this is especially true where strategic considerations come into play. we might also see energyintensive production being relocated owing to the uneven impact of the current energy price shock. added to this, the speed of the transition and the new energy mix will contribute to material transformations. a recent survey finds that around 60 % of firms had increased their inventories of critical products by the end of 2021, and almost 90 % were expecting to regionalise their production over the next three years. [ 9 ] this is likely to reduce efficiency and increase costs, which could create inflation pressures while supply chains are adjusting. it could also make the economic cycle more volatile. over time, however, the turning points i have identified could also dampen the impact on prices. the green transition, for example, should ultimately lead to falling electricity prices. and insofar as the inventory cycle returns, it will be a multiplier for lower prices when inventories are liquidated in a downturn. the ecb ’ s monetary policy response so, to sum up, we are currently facing a situation where lingering supply constraints are an important factor causing above - target inflation to persist for longer – and their effect is being exacerbated by the release of pent - up demand. in this setting, monetary policy needs to avoid deviations from our target becoming entrenched and return inflation to 2 % in the medium term. two considerations are important here. the first is the destination of monetary policy : we need to normalise policy, and be ready to adjust rates by as much as necessary to reach our inflation target in the medium term. the second consideration is the pace of rate increases : since interest rates are rising from very low levels, the pace of rate increases can mobilise the signalling channel of monetary policy directly. let me address each of these points in turn. the destination of monetary policy first, when inflation is high and growth is constrained by inelastic supply, monetary policy cannot remain expansionary and add to inflationary pressures by pushing up demand. it is therefore appropriate to pursue a strategy of monetary policy normalisation. as i explained in a blog post earlier this year, [ 11 ] normalisation implies ending net asset purchases and then raising rates to neutral levels – so levels that are neither expansionary nor restrictive. that is why the ecb has not

as people are being asked to pay the price of the adjustment in terms of either lower wages, or in terms of their jobs. this is occurring at a time when elections are resulting in an increasing number of weak coalition governments, reflecting a lack of social consensus on the way forward. the obvious solution, namely to grow out of the crisis, is not that easy as growth is likely to remain lower for longer. strategies for dealing with unemployment, particularly in europe, are creating further problems. for example, the extension of the working life of individuals in a number of countries, while helping with the demographic problems of dealing with an ageing population, is leading to more youth unemployment. in spain the unemployment rate is 20 per cent, but youth unemployment is closer to 40 per cent. there is a real danger of young people remaining unemployed for some time to come, resulting in deeper structural and social problems. europe remains the biggest area of concern : the weaknesses of the fixed exchange rate system have been exposed. it is not enough to have currency union, as there has to be a credible fiscal union as well, with enforceable limits. while there was growth, the decline in competitiveness in the peripheral european countries could be papered over, and the burgeoning fiscal and current account deficits could be financed, provided that the sovereign debt of these countries was seen to be of the same risk category as the core countries. but that has changed in a dramatic way, although it was surprising that it took the downgrades by the rating agencies to get the markets to react to something that had been evident for some time. the fiscal adjustment in europe and the uk means that growth is going to be very low for some time, perhaps not even in positive territory. however, some countries may have stronger growth, eg germany, if they do not require much fiscal adjustment, and are able to increase productivity and take advantage of the weaker euro. in the us, consumption expenditure is not recovering at the pace initially expected, as high levels of unemployment, a de - leveraging banking sector and a weak housing market remain a constraint on households still faced with excessive debt. china and the asian region in general, as well as some countries in south america, are seen as the main growth poles. however, there are signs that the policy - induced slowdown in china is having some effect. the latest forecasts are for growth of “ only ” 9 per cent. while a policy to cool down the chinese economy was