26. 07. 2022 inflation and growth : economic policy challenges * encuentro foros de vanguardia pablo hernandez de cos governor * lenglish translation from de original in spanish good afternoon. it is a pleasure for me to participate in this event, organised by la vanguardia. i would like to take this opportunity to explain the ecb ’ s most recent monetary policy decisions, in particular those we adopted last thursday. let me first frame those decisions in the context of the current macroeconomic scenario and the inflationary episode. to conclude my address, i will also briefly describe the role that other economic policies can play in addressing the current challenges. the macroeconomic context the current context is one of extraordinary uncertainty. economic activity in the euro area is slowing, weighed down by the war in ukraine. the economy is being adversely affected by the impact on firms of rising energy and commodity costs and the effects of high inflation on households ’ purchasing power, along with the persistent supply - side constraints, supply chain disruptions and heightened uncertainty. to illustrate this point, according to the flash figure published last week, in july the euro area composite output pmi was down by 2. 6 points to 49. 4, putting it in contractionary territory ( below 50 points ) for the first time since february 2021. 1 overall, these factors are casting a considerable shadow over the outlook for the second half of 2022 and the longer term. at the same time, economic activity continues to benefit from the reopening of the economy ( which is underpinning spending on services, in particular in the tourism sector ), a strong labour market, the support of the savings built up by households during the pandemic and fiscal policy support both at the national and european level thanks to the implementation of ngeu - funded projects. against this backdrop, the eurosystem projections published in june envisaged real gdp growth of 2. 8 % in 2022 ( albeit with 2 percentage points ( pp ) relating to carry - over from 2021 ) and 2. 1 % in both 2023 and 2024. these projections represented a further downward revision. for instance, compared with the december 2021 projections, the gdp growth forecasts for 2022 and 2023 were down by 1. 4 pp and 0. 8 pp, respectively. meanwhile, last week saw the publication of the ecb survey of professional forecasters ( spf ) for the third quarter of 2022, conducted in early july. the

story. in typical recessions, the challenge is that there are not enough jobs available for the number of people seeking work. in today ’ s job market, demand for labor is very high — we hear that from employers who are finding it hard to fill all their openings — and a lot of people are getting hired. at the same time, people are leaving their jobs in large numbers, either to look for new work or exit the labor force altogether. this cycle of hires and quits reflects the extraordinary nature of the pandemic, as workers and employers adapt to rapidly changing circumstances. these vacancies won ’ t be filled instantly — it takes time for employers to find the right workers. but as demand for workers and progress on hiring remains strong, i am confident that we will continue to see meaningful job gains and continued progress toward maximum employment. the last aspect of the outlook that i ’ ll speak about is inflation. recent data show core inflation, which excludes volatile food and energy prices, running at about 3 - 1 / 2 percent, which is well above the federal reserve ’ s longer - term 2 percent goal. taking a closer look at the data, it ’ s clear that this spike in inflation largely reflects the transitory effects of the rapid reopening of the economy, which is pushing supply and demand in extreme ways. as the economy gets through these unusual dynamics, i expect inflation to come back down to around 2 percent next year. given the complexity of this topic, i ’ ll go into this in more detail. i find it helpful to view recent developments in terms of three categories. the first is related to prices for goods and services that underwent huge declines during the pandemic but are now rebounding as the economy reopens. for example, in the first year of the pandemic, prices for airfare and lodging fell sharply as people cut back on travel. since then, we ’ ve seen these rebound toward their pre - pandemic trends, pushing the inflation rate up. one simple way to get a better read of inflation that is not overly influenced by these big swings in prices is to take the average inflation rate from the start of the pandemic. that calculation shows that core inflation has averaged 2 - 3 / 4 percent since february of last year. but even that number is heavily influenced by the effects of the pandemic on the second category : used vehicles. even though used cars and trucks are a small category, their soaring