First, why is inflation so low? Second, once we have a decomposition of inflation, we can ask: how likely is it that it persists over the medium-term? Falling commodity prices have accounted for around 80% of the decline in euro area inflation since late 2011.
But there two factors specific to the euro area that contribute to low inflation: the rise in the euro exchange rate and the process of relative price adjustments in certain euro area countries. At present, our expectation is that low inflation will be prolonged but gradually return to 2%.