Mr. Sebastian Barnes:

In terms of reasons for inflation, there are a number of factors. Inflation was incredibly low in the pre-pandemic period, averaging 0.5% per year. It was already starting to creep up through the end of the pandemic, partly because of a shift from services to goods, which put up some goods prices. This was exemplified in construction. We also saw labour shortages and as businesses reopened, some prices were going up.

The real driver to these sorts of levels can be clearly seen as the contribution of energy and, to a degree, food prices. In the months ahead we can probably expect to see it showing more in other prices. Other items that are not explicitly energy and food contain inputs from the energy sectors and we can see that in the euro area inflation, services are starting to play a bit more of a role. These are services from areas that are very energy-intensive, such as transport.

The big question after that is what will happen next. The Stability Programme Update 2022 assumes that oil and energy prices will stay at the same level and one would expect those components to disappear and inflation to come back, at some point, towards a more normal level. The programme update assumes it will go back to approximately 2%, which is the ECB target, although we have not been there for a long time now. There is much uncertainty around that, including how long the immediate knock-on effects will last. It partly depends on policy as to whether inflation will really take off or we will get second-round effects, etc. There is massive uncertainty, but what we see now is very clearly related to energy and food, essentially, along with rents and so on.