and incorporates banks ’ expectations for the next six - month period ( dashed line ). one possible risk is another wave of geopolitical shocks. it is now clear that diplomatic and military confrontations between countries can have dramatic effects on trade, capital flows, growth and prices. 12 given the current state of international relations, we must hope, but certainly not assume, that the global landscape will be more stable in the future than it has been over the past two years. another risk is an increase in political uncertainty within countries. some of the world ’ s largest economies have elected or will elect their leaders in 2024, and political turnover physiologically translates into policy uncertainty : households and investors need to form a view on how incoming governments will handle many critical economic and political decisions. it is hard to imagine how this might affect inflation. uncertainty can disappear without consequences. it can trigger capital outflows and currency depreciations, creating upward price pressures. but it could also shake confidence and weaken demand, halting or even reversing the fragile recovery we have seen so far. in short, we know that we don ’ t know. central banks should be prepared to deal with the consequences of such shocks if and when they materialize. this implies a readiness to use the full range of tools at their disposal to adjust the monetary stance, addressing any threats to price stability, and protect the transmission mechanism of monetary policy. panetta f., 2024, ‘ the future of europe ’ s economy amid geopolitical risks and global fragmentation ’, lectio magistralis delivered at the university of roma tre, 23 april. lagarde c., 2024, ‘ policymaking in a new risk environment ’, speech at the 30th dubrovnik economic conference, dubrovnik, 14 june. reichlin l. and j. zettelmeyer, 2024, ‘ the european central bank must adapt to an environment of inflation volatility ’, bruegel policy brief, 12 june. 5. conclusions let me conclude. the euro area has emerged from a ‘ perfect storm ’, a violent bout of inflation driven by a series of large and unpredictable supply - side shocks. inflation is now on a downward path, and many of the issues that we have debated so vigorously in recent months may become less important going forward. the current macroeconomic picture is consistent with a normalization of the monetary stance. the ecb duly started this process a few weeks ago and

the invasion, inflation was hovering around 5 per cent, and eurosystem economists, analysts and investors broadly agreed that price pressures would recede relatively quickly. in the months that followed, an extraordinary series of energy and commodity price shocks doubled headline inflation, unsettling markets and central banks alike. 5 in short, we entered into a different world. 6 2. should we ( still ) worry about services and wages? in response to the rise in inflation, in july 2022 the ecb started an unprecedented series of rate hikes. this decisive response paid off : supply shocks, bottlenecks and soaring energy prices have not triggered an inflationary spiral, as they had in the past, and inflation expectations remained firmly anchored. the disinflation process is now well under way. inflation fell from a peak of 10. 6 per cent in october 2022 to 2. 6 per cent in may, and the speed of the decline was unprecedented, as the previous increase. however, inflation has not yet returned to target. some commentators have pointed to price dynamics in the services sector and the labour market as possible obstacles in the ‘ last mile ’ of the price stabilization efforts. we should certainly remain vigilant on developments in these areas, but a closer look at the data suggests that the ‘ last mile ’ may require nothing more than patience and a careful monitoring of the ongoing disinflation process. 2. 1. the rise and fall of inflation in the services sector the services sector has attracted attention for two related reasons. first, services inflation seems to be more persistent than goods inflation. second, services price growth remains above the ecb target. let me discuss these points in turn. the persistence is only apparent. it reflects the fact that inflation in the services sector started to rise later, peaked later and started to fall later. in turn, this delayed rise and fall depends on the combination of two forces. one is purely coincidental and specifically related to the pandemic episode. initially, the recovery in consumption was mainly driven by demand for goods, in particular the durable goods that consumers were unable to buy during the first stage of the the shocks had a particularly severe impact on europe, a net importer of most commodities – unfortunately including russian gas. the exorbitant energy bills also left european households with far less money to spend on other goods and services than their american counterparts. as this rough summary suggests, and as i have noted on previous occasions, the euro area faced