Developments during the second quarter of 2010 confirmed the CBT’s assessment that the increase in inflation since the last quarter of 2009 was temporary. The April Inflation Report stated that aggregate demand conditions would support disinflation and that the rise in inflation could be attributed to factors beyond the control of monetary policy such as increases in food, energy and administered prices. In fact, with the reversal of these adverse factors, consumer prices declined by 0.3 percentage points and annual inflation came down to 8.37 (Figure 7). Here I would like to underline that this was the first decline in consumer prices ever in a given quarter (Figure 8). BIS Review 133/2010  3  The course of food prices was instrumental in the favorable outlook of inflation in the last quarter. After climbing dramatically in the past two quarters and prompting consumer prices to soar, food prices plunged sharply during the second quarter of 2010 (Figure 8). The fall in food prices was attributable to the significant decline in unprocessed food prices (Figure 9). In addition, the adoption of import regulations for red meat at the end of April was another factor that slowed down unprocessed food prices more than expected (Figure 10). Besides, processed food prices also decreased during the last quarter, pushing food prices down even further (Figure 9). The favorable outlook of inflation was not only limited to food prices; services and core goods prices also saw a significant slowdown in the second quarter of the year (Figure 11).

Risks  In the last part of my speech, I would like to provide some information on the risks regarding the inflation outlook in the upcoming period and the prospective monetary policy strategies to be implemented should these risks materialize. By influencing commodity prices and external demand conditions, global economic activity would continue to be the main factor driving inflation dynamics and the monetary policy outlook. In this respect, the timing and the extent of monetary tightening to be implemented during 2011 under the baseline scenario may change depending on the course of economic activity. Recently, rising concerns regarding debt sustainability in several euro area countries and the spillover effects to the financial system have led to renewed turmoil across financial markets, underscoring the downside risks to global economic recovery. Furthermore, ongoing problems in credit, real estate and labor markets in advanced economies, with little policy options left in case of further disruption in global economic activity, suggest that downside risks regarding the pace of global growth are likely to persist for some time. Should the global economy face a longer-than-anticipated period of anemic growth, which would consequently delay domestic recovery significantly, the monetary tightening envisaged in 2011 under the baseline scenario may be postponed towards the end of 2011. Moreover, an outcome whereby global economic problems intensify and contribute to a contraction of domestic economic activity may trigger a new easing cycle. By contrast, monetary tightening may be implemented in an earlier period during 2011, should the recovery in economic activity materialize faster than expected.