support the disinflationary impulse in the manufacturing sector, which is particularly sensitive to higher interest rates. as the energy shock unwinds and supply chains normalise, domestic demand, and wage growth in particular, has become the dominant factor driving recent inflation developments, and is expected to remain so over the projection horizon ( slide 3, right - hand side ). demand - side shocks tend to be more persistent, especially in the euro area ’ s institutional environment built on centralised collective bargaining, with wage agreements having an average duration of around two years. price pressures in the services sector, where labour costs represent a larger share of total costs, are therefore expected to fade more gradually. the catch - up in wages is assumed to moderate on the back of falling headline inflation, while current high nominal wage growth is expected to be absorbed, to a large extent, by firms ’ profit margins, thus breaking the vicious circle between wages and prices. firms ’ selling price expectations, which have been correlating closely with consumer price inflation over the past two years, corroborate the assumptions underlying the projections ( slide 4, left - hand side ). in the manufacturing sector, the share of firms expecting to raise prices further has fallen back to prepandemic levels. in the services sector, the share remains higher but has also been coming down for four consecutive months. risks to the inflation outlook tilted to the upside the baseline scenario of the eurosystem staff projections is a plausible representation of how inflation could evolve in the absence of further shocks. that said, the outlook for inflation remains highly uncertain. on the downside, banks may tighten credit standards by more than currently envisaged because of risks to the value of their assets, their exposure to interest rate risk and tighter funding conditions. [ 5 ] a reemergence of financial tensions constitutes another downside risk. together, such effects could accelerate disinflation in the euro area. on the upside, risks are broader. option prices in financial markets suggest that risks to the medium - term inflation outlook remain tilted to the upside ( slide 4, right - hand side ). three types of upside risks can be distinguished. risks of negative supply - side shocks one is that negative supply - side shocks could continue to hit the euro area and global economy. these risks are particularly pertinent for fossil fuels, like gas and oil, due to the green transition and the war in ukraine. there are also other shocks, however, that

2 ), pp. 1 – 43. 22. see darracq - paries et al. ( 2023 ), “ a model - based assessment of the macroeconomic impact of the ecb ’ s monetary policy tightening since december 2021 ”, economic bulletin, issue 3, ecb. 23. while these developments have been dominated by changes in the inflation risk premium, there have also been notable shifts in genuine inflation expectations. moreover, changes in risk premia are not irrelevant for monetary policy as they may signal an impending shift in the belief of investors. 24. see banca d ’ italia ( 2023 ), economic bulletin, april. current high levels could be related to extrapolative behaviour of firms, confirming the relevance of adaptive expectations ; see visco, i. ( 2023 ), “ inflation expectations and monetary policy in the euro area ”, robert mundell distinguished address, 23 march. since the banque de france started conducting a quarterly survey among firms in 2022, the respondent firms have been expecting inflation three to five years ahead to be 3 %. 25. a survey in france finds that while firms ’ inflation expectations show a positive bias, it is significantly smaller than that shown by households. see savignac, f. et al. ( 2021 ), “ firms ’ inflation expectations : new evidence from france ”, nber working paper, no 29376. 26. inflation perceptions refer to developments over the past 12 months. inflation expectations refer to developments over the next 12 months. see also meyler, a. and reiche, l. ( 2021 ), “ making sense of consumers ’ inflation perceptions and expectations – the role of ( un ) certainty ”, economic bulletin, issue 2, ecb. 27. the same gap emerges when using qualitative data from the ecb ’ s consumer expectations survey. 28. see also cœure, b. ( 2019 ), “ the rise of services and the transmission of monetary policy ”, speech at the 21st geneva conference on the world economy, 16 may. 29. see galesi, a. and rachedi, o. ( 2018 ), “ services deepening and the transmission of monetary policy ”, journal of the european economic association, pp. 1 - 33. 30. bouakez, h., cardia, e. and ruge - murcia, f. ( 2014 ), “ sectoral price rigidity and aggregate dynamics