Annual inflation in the euro area has continued to moderate, falling from 2.5% in 2012 to 1.6% in June. Looking ahead, the underlying price pressures over the medium term are expected to remain subdued, reflecting the broad-based weakness in aggregate demand and the modest pace of the recovery.
Inflation expectations nonetheless continue to be firmly anchored in line with the Governing Council’s aim of maintaining inflation rates below, but close to 2%. Risks to the outlook for price developments are expected to be still broadly balanced over the medium term. Upside risks relate to stronger than expected increases in administered prices and indirect taxes, as well as higher commodity prices.