Inflation subsides spontaneously, but too slowly to stabilise the price level

We show in the cases of the United States and the euro zone that after an inflationary shock, inflation subsides spontaneously. This could encourage inaction on the part of the central banks. However: First, the pace of inflation’s retreat is slow, which runs the risk of a change in inflation expectations; Second, the price level rises above its reference level: it is well known that central banks have adopted average inflation targets, equivalent to price level targets. If the central bank does not react, the irreversible rise in the price level leads to a loss of competitiveness and a loss of credibility for the central bank.