7  A breakdo wn o f co re inflatio n by destination of expenditure sho ws that the co mpo nents related to transpo rt reco rded annual price increases abo ve 7% in December, prices in the ho using equipment and maintenance sub-index increased abo ve 9% and inflatio n in the recreatio n, ho spitality and to urism sub-index reco rded gro wth o f nearly 7%. Fo r more details o n these sub-indices, see Pacce, M., A. del Río and I. Sánchez-García (2022), “The recent perfo rmance of underlying inflatio n in the euro area and in Spain”, Analytical Articles, Economic Bulletin 3/2022, Banco de España. 8  This sub-index includes “Clo thing and fo otwear”, “Ho using” excluding energy and ho me maintenance expenditure, “Health”, “Co mmunications”, “Educatio n” and “Miscellaneo us go ods and services”. It includes rental o f ho useho lds’ main residence. 4  above all, of the interest rate differential (hence the different monetary policy response), the increase in global risk aversion and the fact that the energy shock entailed a deterioration in the terms of trade in the euro area (not in the United States). The pass-through of this depreciation may have been faster than in the past taking into account possible non-linear effects 9, since there is evidence that the pass-through is stronger when the exchange rate fluctuations are relatively large, limiting importers’ capacity to absorb foreign exchange rate shocks.
Compared with those published in September, the December staff projections contained an appreciable upward revision in the average inflation rates for 2023 and 2024 to 6.3% and 3.4%, respectively, and also envisaged inflation averaging 2.3% in 2025 (the last year of our projection horizon), above our 2% medium-term target. Importantly, the ECB/Eurosystem staff projections incorporate a number of financial indicators that reflect market expectations of our future monetary policy. A key indicator here is the risk-free yield curve, which is strongly influenced by investors’ views o n the future path of our key interest rates. The risk-free yield curve also plays a central role in the transmission of monetary policy to the economy, because the financing conditions of economic agents (households, firms, governments) are often linked to medium and longterm risk-free interest rates. This is why the staff projections use as an input the path of both short and long-term interest rates implied by the curve. It is also why the ECB, like many other central banks, typically accompanies its decisions on (short-term) interest rates with communication on how it intends, or expects, to set the latter – and other policy instruments – in the future, as this improves its ability to steer the yield curve and thus attain the desired overall monetary policy stance. Therefore, the inflation path in the December staff projections was a clear indication that the financial conditions prevailing before that meeting were inconsistent with a timely return of inflation to our 2% target.