and transfers – which may add to inflationary pressures – or on public investment and debt sustainability. as many of the sources of inflation today are on the supply side, government policies that lift supply and redirect investment to where it is needed are necessary to support sustainable growth. the pace of rate increases the second consideration in responding to current inflation is the pace of rate increases. when inflation is high for a long period of time, an important role for monetary policy is to ensure that inflation expectations remain anchored as the shocks work their way through the economy. if expectations become de - anchored and trigger a wage - price spiral, it can lead to inflation becoming persistent even after the shocks disappear. raising interest rates has a mechanical effect on demand and inflation, and thereby on inflation expectations. but when interest rates are starting from unusually low levels, rate hikes are more powerful if they also create signalling effects that influence expectations directly. in this context, especially compared with the traditional focus on 25 basis - point increments, adjusting the pace of rate hikes is a key tool to signal our determination to fulfil our mandate and keep inflation expectations contained. and moving faster at the start of the hiking cycle clearly conveys our commitment to bring down inflation to our medium - term target. at present, inflation expectations remain relatively well anchored across a range of measures. but there are two reasons why it would be unwise to take this for granted. first, the shock is severely affecting the prices of those consumption items, such as groceries and petrol, that have the greatest influence on households ’ inflation expectations. [ 15 ] the ecb ’ s consumer expectations survey shows that, since february this year, both mean and median expectations for inflation three years ahead have risen by around 1 percentage point. second, we are seeing a rapid change in the economic environment, with inflation switching from being very low to being extremely high. history suggests this can leave a scar on expectations. for example, research finds that differences in inflation expectations between people from the former east and west germany can largely be explained by the lasting effect of the inflation shock after reunification. this contrasted strongly with the perceived norm of zero inflation in the german democratic republic and seems to have led former east germans to over - adjust to an environment of rising prices. this imperative to anchor inflation expectations helps explain why, over the last two policy meetings of the ecb ’ s governing council, we raised our key interest rates by 125 basis points in total. this is the fastest

, a. and pandalai - nayar, n. ( 2019 ), “ input linkages and the transmission of shocks : firm - level evidence from the 2011 tohoku earthquake ”, the review of economics and statistics, vol. 101, no 1, mit press, march, pp. 60 - 75. 5. lagarde, c. ( 2022 ), “ a new global map : european resilience in a changing world ”, keynote speech at the peterson institute for international economics, washington, d. c., 22 april. 6. hamilton, j. d. ( 2011 ), “ historical oil shocks ”, nber working paper series, no 16790, national bureau of economic research, february. 7. bachmann, r. et al. ( 2022 ), “ how it can be done ”, econtribute policy brief, no 34. 8. kuik, f., morris, r. and sun, y. ( 2022 ), “ the impact of climate change on activity and prices – insights from a survey of leading firms ”, economic bulletin, issue 4, ecb. 9. mckinsey ( 2021 ), “ how covid - 19 is reshaping supply chains ”, 23 november. 10. during us recessions from the 1950s to the 1980s, inventory investment accounted for 1. 4 percentage points of the average 2 % peak - to - trough decline in real gdp. see piger, j. m. ( 2005 ), “ is the business cycle still an inventory cycle? ”, economic synopses, no 2, federal reserve bank of st. louis. 11. lagarde, c. ( 2022 ), “ monetary policy normalisation in the euro area ”, the ecb blog, 23 may. 12. the governing council has ( i ) decided to flexibly reinvest maturing securities under the pandemic emergency purchase programme, and ( ii ) launched a new transmission protection instrument. 13. these are the median figures across recessions. 14. see “ a downside scenario related to the war in ukraine and energy supply cuts ”, ecb staff macroeconomic projections for the euro area, september 2022. 15. weber, m., d ’ acunto, f., gorodnichenko, y. and coibion, o. ( 2022 ), “ the subjective inflation expectations of households and firms : measurement