>> we are seeing a transitory surge in inflation. >> this is not a market where everything is going to go up. >> this is all about fundamentals. >> when we look at consumer finance in general, there is still potential for the consumer to spend overtime. >> we are actually starting to see that come in the numbers. >> this is "bloomberg surveillance" with tom keene, jonathan ferro, and lisa abramowicz. tom: good morning, everyone. an interesting day. lagarde in this hour with her comments on paper, non-taper --

on taper, non-taper, and the rest of it. what matters to me is we heard in the opening there, the guests are the quality of what we do at "bloomberg surveillance." ben laidler outlines the fundamentals of the market, and savita subramanian is focused on the bond market. jonathan: it's an upgrade from 3800, but nowhere near some of the price targets out there. into next year, we've heard calls of 5k. so vita -- savita looking for 4600. look at the labor market. i can give you some data that shows you this labor market is tight. i can give you some data that shows this labor market is loose. that debate is going nowhere anytime soon. tom: the distinction on ecb is simple. u.s., maximum stimulus.

ecb, far less stimulus. jonathan: capital economics, their line came out a couple of minutes ago that sums up things perfectly. the ecb slows purchases, but will keep policy ultra-loose. the real test for that is in the italian bond market. the italian bond market is rallying. tom: what does that mean for the bundesbank? jonathan: right now, let's see what you've got. can you make sure the flex ability -- the flexibility in this pandemic emergency purchase program does not get folded into the asset purchase program next year? tom: the smartest thing i've heard, off of sabbatical, just getting back into it, risa, you talked about the pendulum of the s word -- lisa, you talked about the pendulum of the s word. lisa: just to be clear for jon starts rolling his eyes at me, it is hard to talk about stagflation when you are looking at a gdp growth rate of 5% in the united states. it is hard to call this a dismal

backdrop economically. however, this dynamic of peak margins which savita subramanian was talking about, seth carpenter talking about supply-chain disruptions in goods and commodities, how much does that give way to the fundamental weakness that has been overlaid by the pandemic? i think a lot of people are trying to figure that out right now. tom: i am going to say simply the vix comes in from 19 at 18.27. the dow red, the nasdaq green. jonathan: the s&p 500 just a little bit red. down two on the s&p. it is beautiful isn't it, this partnership? i missed you, too. lisa: i just threw up a little in my mouth. [laughter] jonathan: a slightly stronger euro and the mix. that news conference starts in about 20 minutes. we've got jobless claims, too. tom: like a lot of people

watching across this nation, that is what wednesday is about. you take your kids back to school, you start drinking early. [laughter] jonathan: is that what your weekend was? i just wonder where the energy levels were first thing this morning after your three or four day sabbatical. tom: always with a good energy level. david riley saves us right now, with bluebay asset management. i make the economic the stiction of massive stimulus in the united states. how constrained is christine lagarde with a lack of u.s. like stimulus in europe? david: i think it is a constraint, and i think the decision to stay, to reduce the volume of asset purchases, however moderate that maybe, and maybe we will get some insight into that from lagarde in the press conference, is a taper to me. reducing the volume of asset purchases. we know that there is an end point as well for the pepp.

so it sounds to me that it is a taper. i think it has been well flagged within the market, which is why we are not really getting any kind of meaningful reaction. but i think it is quite a contrast with the u.s. on top of the huge stimulus we've had this year and last, but also, inflation really is running above target and has actually been averaging over 2% over the last three years on average. so the u.s. isn't facing a disinflationary, deflationary track, and yet i think that europe is still facing that potential, and yet we are having an ecb that de facto is tapering before the fed. jonathan: tapering at the ecb is not the same is tapering at the

federal reserve because we could get a boost to the asset purchase program next year. ultimately, what does it all mean for markets? personally, if the federal reserve is doing that, it is removing accommodation. if the ecb is doing that, i don't know the answer to that until next year. david: i think that is fair. what happens when the pepp comes to an end to the broader qe asset purchase program, the presumption in the market is that that will increase, but we don't really know by how much it would be increased. we also don't know, as you have been speaking to with your guests as well, in terms of the flexibility, there's lots of constraints around qe that the ecb has which the fed doesn't limit itself by. so i agree with you. we had in july and ecb

concluding with its symmetric target, it would do whatever it takes. at the margin, it is a marginal reduction in the rate of easing, if you want to describe it in that way. lisa: considering the fact that a number of guests have come on this show and said they like europe over the u.s. when it comes to riskier assets, do you disagree with that assessment because you think that in effect, the ecb is taking more of a tightening or less easy approach than the fed at this point? david: i think according to the asset, and european corporate credits, it has been incredibly low volatility. not very much happening, and actually, most of the corporate bond purchases have been done under the qe program rather than the pepp.

that is likely to continue. i think that is this -- that is a reasonable place for investors to be. i just think there is more willingness and policy levers in the u.s., both monetary and fiscal, in order to have a breakout in terms of growth, have a breakout from secular stagnation fears, then there is in europe. i think over the medium term, i would expect u.s. growth sensitive assets to perform. i think u.s. equities will continue to outperform. tom: with that optimistic tone on the american stock market, how do you as a bond guy respond to equity stratus's -- equity strategists basing their call to a heavy waiting on central bank and bond dynamics? david: i think what we've seen within the equity market is what is going on under the hood.

i think equity investors, obviously the bond market matters a lot, particularly for the relative performance of growth, long-duration growth stocks, u.s. tech versus value. i think that real rates are too low in the u.s. i think part of that is due to the distortions created by the fed and its purchases of tips. once the fed does start to taper , we will see real rates move higher. that is going to be in the short-term, at least, a headwind for growth stocks, and therefore a headwind for some of the headline s&p and headline equity indices. but you asked over the medium-term where what i place my bets as to who is going to sustain the recovery and avoid being sucked back into secular stagnation.

i would say the u.s. over europe , and therefore that would make me more bullish over the medium-term for u.s. growth assets. jonathan: david riley, interesting stuff, as always. bluebay asset management, the chief investment strategist. equity futures in the united states just off the lows of the s&p. treasury yields, they erase the rally of the morning as well. we are higher by almost have a basis point. we were lower by a couple of basis points on tens. now 1.3 410% -- now 1.3410%. getting my attention into this ecb news conference, yields into about 72 points on the italian 10 year as the ecb reduces the pages purchases -- the pace of purchases. tom: where is the bid on italian paper?

is it like a draghi trust as he runs the country? is it something else? jonathan: i think politics is part of it. if you think of the last gap wider we had back in 2018, that was down to political uncertainty in the future. i think people look to draghi as stability come but for me, this comes down to the ecb. the ecb from the market perspective, the italian bond market is the northstar. financial conditions have got to remain loose for the country in italy, and for the periphery, too. i think we've been watching it for the last 10 years, and maybe longer. yields unchanged. equities unchanged. what bonds have you got? tom: lake cuomo water supply. jonathan: you are long lake cuomo? nice. like -- lake como or

cuomo? lagarde coming up on bloomberg. that's the promo these days. tom: you just sold it. [laughter] jonathan: coming up in 20 minutes. from new york, this is bloomberg. ritika: but the first word news, ritika gupta. the white house will reportedly unveil a plan today to cut prescription drug prices. according to dow jones, the plan would push to empower the federal government to pass savings on to the private sector. the pharmaceutical industry said it would reduce funding for the development of new drugs. traders are rushing to dump chinese tech stocks after beijing took aim at gaming companies are focusing solely on profits. executives from a number of companies were summoned to a meeting where they were reminded of their obligations to society. one of those companies was tencent holdings, which fell almost 9% today.

in china, inflation at the factory level hit a 13 year high. producer prices rose 9.5% from your earlier, driven mainly by higher prices for commodities. goldman sachs is dropping social distancing rules and its london office and will return to full occupancy next week, according to an internal memo. goldman is already seeing about half of that slogan staff in the office each day. global news 24 hours a day, on air and on bloomberg quicktake, powered by more than 2700 journalists and analysts in more than 120 countries. i'm ritika gupta. this is bloomberg. ♪

>> i would love to see a sooner rather than later us taking our foot off of the accelerator

because i think the longer we make these purchases for longer than necessary, i think it may actually make it so that we have less flex ability down the road. jonathan: robert kaplan there. from new york city this morning, alongside tom keene and lisa abramowicz, i'm jonathan ferro. 12 when its way from initial jobless claims data in america and a news conference with christine lagarde. you're a stronger, euro-dollar $1.18 -- euro stronger, euro-dollar $1.1837. in italy, the italian bond market is bid. yields lower by four or basis points to about 71 on the italian 10 year. so a rally on the periphery this morning. tom: very good. this is a joy. a lot of different opinions on

the market today, but if you are an optimist or you are wondering what the optimist theme is, on a global basis, no one delivers that tone right now, that narrative, like jay p elosky with tpw investment management. thrilled to have you here. i want to cut to your analysis, were you talk about stellar earnings. is that discrete to america, or is that global stellar earnings? jay: it is global. we are probably in the early stages of a handoff to earnings driven markets, so it is important that earnings continue to deliver, and they have delivered not only in the u.s., but also in europe and japan. a little bit less so in emerging markets, but i think that is going to change as we move forward. i am looking for a synchronized global expansion as we exit 2021 and focus on 2022, and that is

going to support continued earnings growth, which is going to support continued higher equity prices, particularly outside the u.s. right now, very bullish on asia. jonathan: why asia? jay: i think we are about to see the true reopening. i've talked about a synchronized global expansion for the last couple of quarters. we haven't really seen it because when asia was open at the early part of the year, europe was closed. now europe and the u.s. are open. asia has been closed. we had pmi's in china and aussie around 45. that's the sound of a lockdown. goldman has a good lockdown index, which is starting to show asia lockdown easing. em has been a big underperformer. every day it is china, knocking down china tech shares. i think we are overweight japan and adding to asia, ex-japan, as

we speak. jonathan: how easy is that to do in practice? jay: i focus per merrily on the etf space, and it is difficult. i would really like to buy the southeast asian nations because that's where all the dynamism is in terms of production and consumption, as the supply chains reopen. that is a segment where you are going. . to have a lot of action very hard to buy -- are going to have a lot of action. very hard to buy. you've got to buy individual country funds. how many funds are you going to have and how many etf positions are you willing to have? so it is tricky. but you play that off of the commodity side, and he'd yes space is pretty good -- and the etf space is pretty good. lisa: i wonder how this factors into the cyclical tilt that you are giving your portfolio, this idea that they are ongoing. this is going to be a problem that is crimping growth and

profitability. what is your call? when are these supply chain kinks worked through? jay: i don't have the crystal ball. i wish i did. i don't know when it is actually going to be all done and perfect. asia is the production factory for the world. it is also where 2/3 of the annual gdp growth comes from. the fact that asia starts to reopen, starts to grow -- china airline departures, for example, were up 30% this month after a short lockdown. so as we move forward, as asia reopens, that is the start of the production reopening. that is the start of the kinks in the supply chain easing. china is having record margins. but back to tom's original point, corporate margins at all-time highs. a earnings growth, 30%. bank of america, one year forward earnings growth estimate globally is at 30% year-over-year.

equities are not going to go down when you have 30% year-over-year. lisa: and what's evita subramanian is saying is that -- what savita subramanian is saying is that perhaps we have peak margins. but this question of ex-china, when you cite china as a lot of the center of these infrastructure type plays that could be potential he positive, are you staying away from china purposefully because of some of the regulatory uncertainty? jay: now. i'm holding -- no. i am holding our china positions. we have china health care positions, china broad tech positions, and we have been holding them throughout these entire couple of months. the growth in china is going to continue, and i am frankly more he worried about ever grand, an evergrand implosion. lisa: do you see any signs of contagion from the evergrand

situation? jay: not yet, but it is something we should all be worried about. it is indebted, and the bonds are basically trading as if it is going to go bankrupt, particularly the offshore bond. tom: come on, they are just going to write it down. the government is going to step in and take the thing down to zero and we move on, right? jay: and they will step on the offshore bondholders, and that is probably in the price. i think you're right. but the question of china and the question of these edicts that keep coming out and the impact on the stocks, i think for the most part it has already bottomed. delta was discounted back in july. i think china government edicts would discount it two or three weeks ago. we haven't come back to those price levels, and i don't think we are going to. you can't keep beating the same drama and have the same impact. markets are too smart for that. we have already moved on, and i think the focus is the pboc

going to ease down the road here . that is quite likely. that is going to provide support. my colleague who runs his own hedge fund in europe, morgan stanley fx strategist, he said this is a kind of shakedown. the chinese government's long state owned enterprises which is not growing. they don't have a play in the private fast-growing tech sector in china. they want that play. they are going to drive the price down, and then start to take positions. you saw it in the first foray here with didi talking about a state of enterprise taking a stake. there's a lot going on here. china understands it needs to raise capital. they have tremendous needs to raise capital. so they are not going to kill the equity market. this is a social issue, and we are probably 2/3 of the way through it. jonathan: we didn't even talk

about europe, so you where you go -- so there you go. [laughter] a headline crossing the bluebird, china releasing national crude oil reserves the first ash the bloomberg, china -- the bloomberg, china releasing national crude oil reserves for the first time. this is bloomberg. ♪

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jonathan: live from new york city for our audience worldwide, this is "bloomberg surveillance." jobless claims coming out in a couple of seconds. after we break down with michael mckee we will turn to an ecb news conference in frankfurt, germany. s&p futures down about six on the s&p. yields in almost one basis point. there is the data. there is mike mckee. michael: good news on the jobless claims front, which is a little bit of a surprise. 310,000 down from a revised number of 354,000. at this point it is a big drop in the lowest since march 14 of

2020, when it was 256,000. we are getting backed out of to the pre-pandemic level. at 310,001 would expect we could get down to the 200,000 in the next couple of weeks or so depending on seasonal adjustments. i do not see any indication states had to excavate claims. maybe next week we will see some effects from that because of people who cannot get to work would be filing. jonathan: thank you. the right side of downside -- the right kind of downside surprise. very little price action on the back of it. tom keene, i can see they've entered the room in frankfurt, germany for the ecb news conference. president lagarde standing by

alongside the ecb finance president. do you think this will be a testy one? tom: there is three of them, it is set up fancy versus what chairman powell does. i love the podium. jonathan: you like that. tom: it is blue. jonathan: you think they copied us? tom: can you imagine of axel weber was up there now? it might be a different tone than what we would get from christine lagarde. jonathan: let's get that tone right now with ecb president christine lagarde after leaving rates unchanged but adjusting the pace of the pandemic emergency purchase program. that news conference is about to begin. euro-dollar positive a little more than a 10th of 1%. let's take a listen. pres. lagarde: the vice

president and i welcome you to our press conference. the rebound phase in the recovery of the euro area economy is increasingly advanced. output is expected to exceed its pre-pandemic levels by the end of this year. with more than 70% of european adults fully vaccinated, the economy has largely reopened. allowing consumers to spend more and companies to increase production. while rising immunity to the coronavirus means the impact of the pandemic is now less severe, the global spread of the delta variant could yet delay a full reopening of the economy. the current increase in inflation is expected to be largely temporary and underlying price pressures are building up only slowly.

the inflation outlook in our new staff projection has been revised slightly upwards, but in the medium-term inflation is foreseen to remain well below our 2% target. financing conditions for firms, households, and the public sector have remained favorable since our previous quarterly assessment in june. favorable financing conditions are essential for the economy to continue its recovery and to offset the negative impact of the pandemic on inflation. based on a joint assessment of financing conditions in the inflation outlook, the governing council judges let favorable financing conditions can be maintained with a moderately lower pace of net asset

purchases under the pandemic emergency purchase program then in the previous two quarters. we also confirmed other measures , namely the level of the key ecb interest rates, our forward guidance on their likely future evolution, our purchases under the asset purchase program, our reinvestment policies, and our longer-term refinancing operations as detailed in the press release published at quarter to 2:00 today. we stand ready to adjust all of our instruments as appropriate to ensure inflation stabilizes at our 2% target over the medium-term. i will now outlined in more detail how we see the economy and inflation developing and then talk about our assessment of financial and monetary

conditions. let's turn to the economic activity. the economy rebounded by 2.2% in the second quarter of the year, which was more than expected. it is on track for strong growth in the third quarter. the recovery builds on the success of the vaccination campaign in europe, which has allowed a significant reopening of the economy. with the lifting of restrictions, the service sector is benefiting from people returning to shops and restaurants and from the rebound in travel and tourism. manufacturing is performing strongly even though production continues to be held back by shortages of materials and equipment. the spread of the delta variant has so far not required lockdown measures to be reimposed, but it

could slow the recovery in global trade and the full reopening of the economy. consumer spending is increasing, although consumers remain somewhat cautious in light of the pandemic developments. the labor market is also improving rapidly, which holds out the prospect of higher incomes and greater spending. unemployment is declining and the number of people in job retention schemes has fallen by about 28 million from the peak last year. the recovery in domestic and global demand is further boosting optimism among firms, which is supporting business investment. at the same time, the remains some way to go before the damage to the economy caused by the pandemic is overcome.

there are still more than 2 million fewer people employed than before the pandemic, especially among the younger and lower skilled. the number of workers in job retention schemes also remains substantial. to support the recovery, ambitious targeted and coordinated fiscal policy should continue to complement monetary policy. in particular, the next generation eu program will help ensure a stronger in uniform recovery across euro area countries. it will also accelerate the green and digital transition, support structural reforms, and lift long-term growth. we expect the economy to rebound firmly over the medium-term. our new soft projections for seat annual real gdp growth at 5% in 2021, 4.6% in 2022, and

2.1% in 2023. compared with our june projections, the outlook has improved for 2021 and is broadly unchanged for 2022 and 2023. inflation increased to 3% in august. we expect inflation to rise further this autumn, but to decline next year. this temporary upswing in inflation mainly reflects a strong increase in oil prices since the middle of last year, a reversal of the temporary reduction in a germany, delayed summer sales in 2020, and cost pressures that stem from temporary shortages of materials and equipment.

in the course of 2022, these factors should ease or will fall out of the year on year inflation calculation. underlying inflation pressures have edged up. as the economy recovers further, and supported by our monetary policy measures, we expect underlying inflation to rise over the medium-term. this increase is expected to be on the gradual since it will take time for the economy to return to operating at full capacity, and therefore wages are expected to grow only moderately. measures of longer-term inflation expectations have continued to increase, but these remain some distance from our 2% target. the new staff projections foresee annual inflation at 2.2% in 2021, 1.7% in 2022, and 1.5%

in 2023, being revised up compared with the previous projections in june. inflation, excluding food and energy price inflation, is projected to average 1.3% in 2021, 1.4% in 2022, and 1.5% in 2023, also being revised up from the june projections. let's turn to the risk assessment. we see the risks to the economic outlook as broadly balanced. economic activity could outperform, and expectations if consumers become more confident and save less than currently expected. faster improvement in the pandemic situation could also

lead to a stronger expansion than currently envisioned. if supply bottlenecks last longer and feedthrough into higher than anticipated wage prices, price pressures could be more persistent. at the same time, the economic outlook could deteriorate if the pandemic worsens, which could delay the further reopening of the economy, or if supply shortages turn out to be more persistent than currently expected and holdback production. let us look at the financial and monetary conditions. the recovery of growth and inflation still depends on favorable financing conditions for all sectors of the economy. market interest rates have eased over the summer, but reversed

recently. overall finance conditions for the economy remain favorable. bank lending rates for firms and households are at historically low levels. lending to households is holding up, especially for house purchases. the somewhat slower growth of lending to firms is mainly due to the fact that firms are still well-funded because they borrowed heavily in the first wave of the pandemic. they have high cash holdings and are increasingly retaining earnings, which reduces the need for external funding. for larger firms issuing bonds is an attractive alternative to bank loans. solid bank balance sheets continue to ensure sufficient credit is available. however, many firms and households have taken on more debt during the pandemic.

the deterioration of the comic outlook threatens financial health. this would worsen the quality of bank balance sheets. policy support remains essential to prevent balance sheets strains and tightening financing conditions from reinforcing each other. in conclusion, the euro area economy is clearly rebounding. however, the speed of the recovery continues to depend on the course of the pandemic and progress with vaccinations. the current rise in inflation is expected to be largely temporary , and underlying price pressures will build up gradually. the slight improvement in the medium-term inflation outlook and the current level of financing conditions allow favorable financing conditions to be maintained with a moderately lower pace of net

actually -- of net asset purchases under the pepp. our policy measures, including a revised forward guidance on the ecb interest rates, are key to helping the economy shift to a sustained recovery and ultimately to bringing inflation to our 2% target. we now stand ready to take your questions. thank you. >> today the first question goes to the wall street journal. >> thanks for taking my question. i had two questions. the first was on the pace -- on the discussion around reducing asset purchases. some of your councilmembers have suggested they would like to see the pepp program coming to an end. did you characterize this as a taper or is it a turning point?

how would you characterize the move? the second question was around why you feel confident enough to do this. your 2023 outlook for inflation is 25%, which is somewhat below your medium-term target. there also seems to be a lot of uncertainty in the economy around delta and around the slow down in china. why did you think reducing the stimulus was the correct way? thank you. pres. lagarde: thank you so much for your questions. i would preface my response to your first question with a quote, which is the lady is not tapering. what we are doing is recalibrating pepp, which is the pandemic emergency purchase

program, and we are recalibrating just as we did in december and march. we are doing that on the basis of framework, which is a joint assessment. we look at the financing conditions and we concluded they remain favorable and we do that on the basis of the inflation outlook. as you rightly pointed out, our inflation outlook has been upgraded and it has been the case for 2021, 2022 come and to a lesser extent in 2023. across the board you have improvement on the inflation numbers for the horizon we look at. we also look at other indicators. on those accounts there has been a significant improvement on inflation numbers, both for 2022 and 2023.

on the basis of that joint assessment and because we know we need to keep favorable financing conditions, this is the commitment we have and what we agreed in december. that has not varied. we believe we can maintain favorable financial conditions with moderately lower pace of purchase. the choice of words is relevant. it is moderately lower than what we have done in q2 and q3. our be confident enough? -- are we confident enough? the september meeting is conducted in the light of our projections. what we are seeing is clearly an improvement on many fronts. the output numbers are much higher. the inflation numbers have been upgraded.

the employment numbers have also improved, and the unemployment situation is serious, but more benign than was anticipated. on the basis of that and the success of the vaccination campaign, which we have said is critically important to determine the economic recovery, we believe the euro area economy is rebounding and that gives us the confidence to take the measures we have taken, which is a recalibration of pandemic emergency purchase programs for the next three months. >> thank you. next question goes to isabella. over to you. >> hello and thank you. nice to see you.

i have two questions. my first question is on financing conditions. for how long will the ecb president favor low financing conditions to support the recovery? will favorable financial conditions end at the end of the pandemic emergency purchase program? my second question is on pepp. as the coronavirus crisis enters the next phase with the new delta variant but also a better economic outlook and pace of vaccinations, tell us how the governing council intends to judge and assess the end of the covid crisis given that pepp will end when the covid crisis is over? thank you. pres. lagarde: thank you very

much. it is very nice to see you as well. this is a significant improvement from previous press conferences. the next step will be to see each other with appropriate distance between us. on the commitment for favorable financing conditions, i will remind you that was decided at our governing council meeting in december. pepp is an emergency program specifically designed for the circumstances we have been facing, that we still face today but are currently improving. this commitment to the favorable financing conditions is one of the two parts of the joint assessment we conduct to determine our rate of purchase. we have a framework that is clearly designed and operates in relation to pepp. the day when pepp is over, which

would indicate financing conditions are favorable and that the economy will have recovered in such a way that the downward impact of the pandemic or inflation outlook has been resolved, at that point in time the job is not finished because we are still targeting our 2%, which is clear and straightforward as a result of our strategy review. symmetric 2% medium-term with us focus -- with a focus resulting in the lower bound. that will continue. the driver of our work going forward after pepp will be the mandate we have to maintain price stability as measured by our target of 2% inflation.

on your second question, which has to do with pepp in general. what we have done today with the governing council eat at this -- with the governing council unanimously -- to continue our goal of favorable financing conditions. we have not discussed what comes next. this is something for which we will prepare in the months to come, and i think there will be more interesting matters that will be debated in december, and for which clearly you will be informed in due course. thank you. >> the next question goes to alexander weber of bloomberg news. alexander, please. alexander?

can you hear us? go ahead, please. >> thank you. thank you for taking my question. some of your colleagues have recently emphasized the upside risk to the inflation outlook and that high inflation could prove more permanent than currently expected. can you tell us whether this view is widely shared within the governing council? a question on your monetary stimulus. how much note we give markets before the pepp comes to an end? pres. lagarde: i completely missed your second one. >> how much advance notice will you give to markets before the pepp comes to an end? pres. lagarde: thank you for

your first question because i will take advantage of that want to discuss how we conducted our discussion on inflation. it is the case that in many countries in the euro area people are seeing prices increase and they can feel it. we have to go under the skin of inflation before we assess whether this is temporary, whether it is going to last, and that leads us to the conclusion of our inflation outlook, which as you know is 1.5 at the end of the projection horizon. what we have at the moment? three factors that are driving prices up. the first set of factors has to do with the reopening of the economy. this is the entire dynamic. it went down -- prices at the time also went down. the economy reopened. from a supply point of view, from a demand point of view,

there is pressure on prices. you can see that in what we call the base effects. a lot has to do with energy prices, which constitutes a large component of the base effect inflation factor. you can see that on the german impact, which obviously will continue to play out until the end of the year. you see that in the carbon tax that was decided in germany. those are the base effects reopening of the economy related factors. as part of the reopening of the economy factors, i would distinguish the supply bottlenecks effect, and this is something corporate's and companies are telling us. there are bottlenecks, not just in the semiconductor business but also sectors that are more

or less affected depending on how much they rely on those raw materials or equipment that they get their supplies from. this is impacting the durable and nondurable goods. how strong will that effect be? how long will that last is something that obviously remains to be seen. we have put that particular item, if your member the monetary policy statement i read for you, we have put that in the inflation, and that is where we say that if those supply bottlenecks last longer than expected, then it will increase prices and will happen upside pressure. we are not certain. typically what we have seen in previous situations is when you have a bottleneck on your

supply, you try to find alternatives to that supply and as a result of that the supply bottlenecks impact of inflation is reduced and goes away. in the same vein, if it is bottlenecks inflation that applies without too much on the demand front, it is not necessarily conducive to a second-round effect on wages. that is the third one. the third one, which is quite interesting, especially when you disaggregate it is the inflation related to services. we have seen a reopening of the economy on the service front in the most recent months, and when you analyze where the inflation is in the segment of services, you see most of it is coming from what is subject to social distancing, which has been reactivated.

those are the three key drivers of inflation at the moment. as you can see, many of them are of a temporary nature. it will last for a period of time and fall out of the period of reference and fade out over the course of time. one component we are addressing, monitoring, and checking very attentively is the second round effect, the impact price increases will have on wage negotiations. that is what could fuel a more persistent and durable price increase and inflation going forward. on the wages front, we are not seeing much by way of significant increase. we have bill be -- we will be very attentive to activity taking place in some countries, but at this point in time we do

not expect this wage increase and this wage negotiation to be very strong. we will see gradual and moderate decrease as a result of that. that is what i wanted to try to explain to you in response to your question about inflation. concerning pepp, that is a discussion we will address comprehensively at our december meeting as the term of pepp approaches. we need to discuss the terms and conditions of how that term occurs. you will hear me again on this matter, and certainly at our december meeting. >> thank you. the next question is for cnbc.

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