Inflation developments in the euro area ó an update

This section reviews recent inflation developments in the euro area, using a simple open-economy version of the Phillips curve. It also discusses the inflation outlook in the near future. Inflation has been exceptionally low for a prolonged period in the euro area and the other main economic areas. Our results show that the current subdued inflation in the euro area can be explained in large part by the fall in oil prices, but subdued domestic cost pressures due to weak economic activity have also played a role. The weaker euro has only partly dampened these downward price pressures. Looking forward, positive base effects stemming from energy-price and core inflation are expected to raise headline inflation. Particularly strong base effects in December 2015 and January 2016 are expected to raise it by around 0.5 pps in each of those months. Although various inflation expectation measures remain below historical averages, they point to gradually increasing inflation in the euro area in the coming years.