Gabriel Makhlouf: Inflation dynamics in a pandemic - maintaining vigilance and optionality

Remarks by Mr Gabriel Makhlouf, Governor of the Central Bank of Ireland, on the occasion of the publication of the Economic Letter "An overview of recent inflation developments" by David Byrne and Zivile Zekaite, Dublin, 23 November 2021.

The views expressed in this speech are those of the speaker and not the view of the BIS.

After more than a decade of very low inflation in the euro area, and especially in Ireland, prices for many goods and services have risen faster in 2021. We know that many people are feeling these very real price increases, in particular across their energy and fuel bills. The key challenge for policy makers now is to assess the extent to which relative prices are adjusting to the ebb and flow of supply and demand in the pandemic environment or whether the fundamental dynamics of the inflation process have altered, resulting in broad-based inflation trends. In these remarks, I outline the main drivers of recent inflation, the prospects for inflation over our forecast horizon, and what this means for policy.

My starting point is something that I wrote about at the start of the pandemic, paraphrasing the famous opening line from Anna Karenina: "all financial crises are alike but an economic crisis is unique in its own fashion". It remains my view that the economic crisis caused by the pandemic – when economies closed down in the way so much of the world chose to – has no precedent in known history. We experienced – and are experiencing – an unusual combination of demand and supply shocks.

Over the last decade, inflation – that is whether consumer prices are rising or falling and by how much – had been very low in the euro area. Ireland was no exception to this general trend with prices for goods and services rising slowly. As the Irish and wider euro area economy reopened earlier this year, inflation dynamics have been quite different with prices increasing more rapidly.