What happens if inflation remains permanently higher and central banks react softly to it?

Inflation is likely to stabilise in the United States and the euro zone at a higher level than before the COVID crisis, due to higher commodity prices (even though they have fallen sharply from their peaks) and stronger bargaining power among wage earners. As the indexation of wages to prices remains quite weak, inflation is unlikely to be high, but it will be higher. The high level of public debt ratios and asset prices, the need in the euro zone to ensure the sustainability of each country’s public debt and the desire to boost employment will lead central banks to react “softly” to this additional inflation. To be sure, they will exit quantitative easing (first the Federal Reserve, later the ECB) and they will raise short-term interest rates (from 2022 in the United States, from 2023 probably in the euro zone), but their reaction will still be weak . The next few years should therefore see: A trend towards yield curve inversion as short-term interest rates are raised ; Continued negative real long-term interest rates.