near - term inflation expectations are quite elevated. in the ces, the medium - term inflation expectations of households also remain well below the near - term inflation expectations. across all available sources, macroeconomic expectations ( and prospects at the individual level ) suggest a high degree of concern about a potential economic slowdown, a general recognition that supply shocks will generate both near - term inflation surges and a decline in the economic outlook, which in turn will constrain the persistence of inflation. this profile is consistent with a profile in which market participants, experts and households broadly understand ( albeit to varying degrees ) that supply shocks and temporary factors have pushed inflation up to the current high levels but that these factors are expected to fade over time, reinforced by the understanding that monetary policy actions ( as captured by the expectations of substantial rate hikes in the coming months ) will ensure the return of inflation to target. in terms of the feedback loop from inflation expectations to nominal and real dynamics, it is important to appreciate that, for any given nominal yield curve, if high near - time inflation expectations are accompanied by expectations of a deteriorated macroeconomic outlook and significant uncertainty then the inflation cycle is less likely to be amplified through an endogenous increase in consumption, investment and credit compared to an alternative scenario in which high near - term inflation expectations are accompanied by macroeconomic optimism. put differently, cost - push inflation shocks are less likely to give rise to a pro - cyclical real interest rate channel compared to demand - driven inflation shocks. at the same time, market - based indicators of inflation risk and the right - tail of responses in the expert and household surveys also clearly show that the risk of inflation not returning to target in a timely manner is priced by market participants and feared by some survey respondents. as indicated in our recent monetary policy statements, such above - target revisions to some indicators of longer - term inflation expectations warrant close monitoring. in tracking these right - tail indicators, two conjectures are especially relevant. in one direction, more attentive traders, experts and individuals may identify more quickly a persistent shift in inflation dynamics, while inattentive participants adjust more slowly. under such scenarios, as highlighted in the pioneering work of ricardo reis, right - tail measures will be leading indicators for a generalised revision in long - term inflation expectations. [ 2 ] however, under other scenarios, the right tail might be populated by those who over - react to high spot inflation readings and mis - perceive as permanent what turns out

current high uncertainty about inflation dynamics and monetary policy transmission means that a multi - step adjustment path towards the terminal rate also makes it easier to undertake mid - course corrections if circumstances change. while upside risks to inflation are currently more intense than downside risks, if the incoming data ( new shocks, updates on the relative strength of opposing adjustment forces ) call for a downward shift in the terminal rate, this would be easier to handle under a step - by - step approach. such risks not only include downside scenarios to the economic outlook but also external factors that could tighten financing conditions independently of domestic monetary policy actions ( such as the spillover impact of monetary policy tightening in other countries or shifts in risk sentiment in global markets ). for this reason, even if the general direction of monetary policy is shaped not only by the centre of the risk distribution but also by the current net upside skew, the agility to adjust the scale and speed of interest rate hikes remains vitally important. the incoming data on inflation expectations play an important role in our integrated assessment of economic, monetary and financial conditions. all sources — market - based data, the survey of professional forecasters ( spf ), the survey of monetary analysts ( sma ), the consumer expectations survey ( ces ), the partial data on firm - level expectations from the corporate telephone survey ( cts ), the survey on the access to finance of enterprises ( safe ) and national sources, the surveys of the european commission, and a range of external surveys — are closely examined in relation to the formation of near - term, medium - term, and long - term inflation expectations. we also assess, where available, expectations about macroeconomic indicators ( and the reported individual prospects of the surveyed households and firms ). even under scenarios in which long - term inflation expectations are firmly anchored, the evolution of near - term and medium - term inflation expectations and macroeconomic expectations play important roles in determining inflation and macroeconomic dynamics over these horizons. clearly, the worst - case scenario would be characterised by the deanchoring of long - term inflation expectations, which would be very costly to fix. except under very artificial model specifications, inflation outcomes and macroeconomic outcomes will be important factors in determining inflation expectations and macroeconomic expectations, as individuals update their beliefs based on realised inflation and economic developments. by and large, the market - based indicators of inflation compensation and the expert surveys indicate that long - term inflation expectations remain close to the two per cent target, while