As a matter of fact, the contribution of private consumption and investment spending to the recovery in advanced economies has not currently reached the desired level. The ongoing balancesheet restructuring across households and firms, and the consequent slow and protracted recovery in employment and credit conditions put a cap on private consumption and investment. Furthermore, persisting and mounting concerns over the sustainability of sovereign debt continue to pose downside risks on global economic activity, especially in the euro area. The growing discrepancy between advanced and emerging economies, which became more pronounced in the post-crisis period, is expected to continue for an extended period of time. BIS central bankers’ speeches  1  5. The divergence in the pace of recovery between these two country groups has undoubtedly significant implications for inflation and monetary policy. Yet, before moving on to global inflation and the monetary policy outlook, I find it useful to mention the upward trend in commodity prices observed with the recovery process since this upsurge is becoming even more significant for both the global inflation outlook and the monetary policy. 6. The recovery in global economic activity has also been manifested in commodity prices, and the upward trend in commodity prices, which started following the peak of the crisis, continued throughout 2010. In this period, the strong course of economic activity in China and India, two countries that account for a significant share of global commodity demand, reinforced the upward trend in commodity prices.

As a matter of fact, the effect of the recent increases in commodity prices has been materialized on inflation in many countries and more primarily in emerging economies. One reason for this is the higher share of food and energy in the consumption basket in emerging economies compared to that of advanced economies. Another reason is the rapidly closing output gaps amid the strong course of economic activity in emerging economies causing higher pass through of commodity driven supply-side shocks to prices. Hence, advanced and emerging economies diverge significantly not only in terms of economic activity, but also in terms of inflation outlook. 10. This divergence between growth and inflation outlook also led to differences in monetary policy practices between advanced and emerging economies in 2010. In this period, central banks of advanced economies focused on supporting the economic recovery and speeding up the improvement in employment and credit conditions. Accordingly, the low  BIS central bankers’ speeches  3  level of interest rates in advanced economies was maintained, and monetary easing continued in 2010 as well. 11. Ample liquidity as a result of low interest rates and the ongoing quantitative easing in advanced economies encouraged global investors to seek higher returns and demand risky assets. Consequently, emerging economies experienced a surge of capital flows. The divergence between the pace of recovery in advanced and emerging economies in favor of emerging economies, as well as the permanent improvement of the risk sentiment for emerging economies in the post-crisis period also supported these capital inflows.