prices alone explains more than half of the headline inflation figure. in the medium term, it is critical whether rising energy prices will increase inflation expectations and wages or change firms'pricing behaviour. energy inflation and supply chain bottlenecks alone would not lead to a sustained acceleration in inflation unless there are major second round effects, leading to a wage - price spiral. unlike in the united states, with its labour market red hot, wage inflation in the euro area has been rather moderate – until recently, that is. we have seen clear signs of acceleration in the first months of this year. that ’ s why we must be mindful of not letting inflation expectations become unanchored, which would be very damaging to price stability. this is now the single most critical factor in determining the course of monetary policy. last december, the ecb governing council started the gradual process of monetary policy normalisation. and we have been fortunate to have our renewed monetary policy strategy in place as we face the current turmoil. the ecb strategy review was a critical turning point in ecb monetary policy. it was the final step in the process of making the ecb a modern central bank since mario draghi ’ s “ whatever it takes ” speech. the ultimate reason for the strategy review was the emergence of profound structural changes in the euro area and the world economy. these include the change in the relationship between the spare capacity of the economy and inflation, the fall in natural interest rates, and sluggish productivity growth. according to the revised strategy, price stability – the primary objective of the ecb – is best maintained by aiming for 2 % inflation over the medium term. the inflation target is symmetric : the governing council considers both inflation above and below this 2 % target to be equally undesirable. the new strategy was worked out in 2020 – 21 in a disinflationary, even deflationary environment, and it serves to ensure that the economy does not get stuck in a situation of too slow inflation for a prolonged period. the governing council also stated that inflation may also be temporarily moderately above the target. the medium - term orientation of monetary policy allows for a better emphasis in decision - making on other objectives that are important for all euro area countries, such as full employment, without, of course, jeopardizing price stability. i tell you this also to illustrate how quickly the operating environment of monetary policy has changed. it was still less than a year ago, i recall, that some commentators

an increase in credit risks and non - performing loans. not least because many customers of banks haven ’ t even fully recovered from the pandemic. in times like these, we need a strong financial system to smooth the transmission of monetary policy and to prevent credit crunches. we should likewise avoid negative feedback loop effects between the real economy and the financial system. fortunately, the global and european regulatory, supervisory and institutional reforms undertaken after the financial crisis have made the financial system much more resilient than it used to be. the years of crises have highlighted the need to constantly evaluate the role and scope of monetary policy and its relation to macroprudential policy. in the ecb strategy review, we addressed the role of fiscal policy, macroprudential policy, financial stability and monetary and fiscal policy interactions. macroprudential policy has essentially become the second key pillar of central banking today, alongside monetary policy. when financial stability risks grow, macroprudential and microprudential policies are the first line of defence. most often, macroprudential policies and monetary policy are complementary. for instance, macroprudential policies that avoid a build - up of imbalances reduce the likelihood of future financial crises with negative effects on price stability. monetary policy may also affect financial stability risks. on the one hand, accommodative monetary policy can reduce credit risk by boosting economic activity and inflation dynamics. on the other hand, accommodative monetary policy may encourage the build - up of leverage or raise the volatility of asset prices. hence, monetary policy actions should always be proportional. similarly, monetary policy tightening can either decrease or increase risks concerning financial stability. since financial crises can threaten price stability, there is a clear case for the ecb to take financial stability considerations into account in its monetary policy deliberations. the ecb already takes into account the existing limitations of macroprudential policy in different phases of the financial cycle, the interactions between macroprudential policy and monetary policy, and possible side effects of monetary policy on financial stability. at the same time, it is important to avoid the misperception that monetary policy would be responsible for guaranteeing financial stability. the eurosystem follows a flexible approach in taking into account financial stability considerations. any monetary policy response to financial stability concerns will depend on the prevailing circumstances and will be guided by the implications for medium - term price stability. to this end, efforts to overhaul the ec