Understanding the new relationship between inflation, nominal interest rates and real interest rates

OECD countries are now looking at : Higher inflation (labour market pressures in some countries, energy transition); A moderate response by central banks to the inflation, due to their other objectives (debt sustainability, support for investment and employment); Therefore an under-indexation of nominal interest rates to inflation, lead ing the increase in inflation to push down real interest rates. This gives a rise in inflation very significant, new properties. This configuration where a rise in inflation leads to higher nominal interest rates but lower real interest rates is very comfortable for central banks: They can show that they are responding to inflation (even if only slightly); The decline in real interest rates is conducive to a decline in debt ratios; It boosts asset prices (equities, real estate and other real assets), giving investors a hedge against inflation; It supports investment in the energy transition.