to the most recent data, median expectations are close to 3 %, while average expectations have increased from 3 % a year ago to almost 5 % today. average long - term inflation expectations of professional forecasters, too, have started to gradually move away from our 2 % target. in july, they stood at 2. 2 %, a historical high. for both consumers and professional forecasters, we are also observing a marked increase in the right tail of the distribution – that is, the share of survey participants who expect inflation to stabilise at levels well above our 2 % target. [ 26 ] option prices in financial markets paint a similar picture. in the 1970s, such shifts in the right tail of the distribution preceded shifts in the mean. we broadly know why these shifts happen among consumers who are financially less literate. these consumers predominately form their expectations based on inflation experiences. but for the euro area, the ecb ’ s consumer expectations survey shows that people who are financially more literate and who see themselves as playing a relevant role in actual price and wage - setting have recently revised their medium - term inflation expectations to a larger extent than other survey participants. this is a source of concern. unlike for consumers who form their expectations based on their experience of inflation, the higher inflation expectations of financially literate people are unlikely to subside if and when inflation starts decelerating. this increases the probability of second - round effects. we cannot say for certain what is behind these upward revisions to inflation expectations. but two potential explanations come to mind. one is that higher medium - term inflation expectations may be the result of a perception that monetary policymakers have reacted too slowly to the current high inflation. a cardinal principle of optimal policy in a situation of above - target inflation is to raise nominal rates by more than the change in expected inflation – the taylor principle. if real short - term interest rates fail to increase, monetary policy will be ineffective in dealing with high inflation. in the united states, a systematic failure to uphold the taylor principle was one of the key factors contributing to the persistence of inflation in the 1970s. the second explanation is that higher inflation expectations may reflect more fundamental concerns, possibly related to fiscal and financial dominance, or to the recent review of central banks ’ monetary policy frameworks that focused more on the challenges of too - low inflation rather than too - high inflation. all these factors may have created perceptions of a higher tolerance for inflation and a stronger desire to stabilis

2003 ), “ making monetary policy in an uncertain world ”, proceedings – economic policy symposium – jackson hole, federal reserve bank of kansas city. 21. for forecasting errors, see ecb ( 2022 ), “ what explains recent errors in the inflation projections of eurosystem and ecb staff? ”, economic bulletin, issue 3. for the costs of underestimating inflation persistence, or the non - accelerating inflation rate of unemployment, see primiceri, g. ( 2006 ), “ why inflation rose and fell : policy - makers ’ beliefs and u. s. postwar stabilization policy ”, the quarterly journal of economics, vol. 121, no 3, pp. 867 - 901. 22. walsh, c. ( 2003 ), “ implications of a changing economic structure for the strategy of monetary policy ”, proceedings – economic policy symposium – jackson hole, federal reserve bank of kansas city. see also walsh, c. ( 2022 ), “ inflation surges and monetary policy ”, imes discussion paper series, no 2022 - e - 12, bank of japan. 23. james, h. ( 2022 ), “ all that is solid melts into inflation ”, project syndicate, 5 july. 24. for the euro area, see eurobarometer 96, winter 2021 - 2022. 25. ecb ( 2022 ), “ consumer expectations survey ”. medium - term inflation refers to inflation three years ahead. 26. systematic data on firms ’ medium - term inflation expectations remain scarce. recent analysis, however, suggests that firms may use price changes observed along the supply chain to form their expectations. see albagli, e., grigoli, f. and luttini, e. ( 2022 ), “ inflation expectations and the supply chain ”, imf working papers, no 22 / 161, international monetary fund. 27. reis, r. ( 2022 ), “ inflation expectations : rise and responses ”, ecb forum on central banking, sintra, 29 june. 28. reis, r. ( 2021 ), “ losing the inflation anchor ”, brookings papers on economic activity, fall 2021. 29. there is abundant empirical evidence suggesting that inflation expectations are adaptive, meaning that the current long period of very high energy and food prices will shape people ’ s beliefs about the future. see, for example, burke, m. and manz, m. ( 2014 ), “