together with the elevated degree of uncertainty at the time, led to a considerable slowing in wage growth in the private sector. weak demand growth also put downward pressure on firms ’ margins, and the appreciation of the exchange rate has recently led to price reductions for many imported goods. given the inevitable lags, these factors are likely to see underlying inflation in year - ended terms come down a bit more in the near term. notwithstanding this, the outcome for the march quarter was slightly higher than we, and most market observers, had been expecting. one clearly needs to be cautious in interpreting a single figure. however, this outcome is consistent with the idea that the disinflationary forces in the economy are not quite as strong as previously expected, largely because the economy has performed better than previously expected. one other aspect of the recent data on inflation worth noting is the divergent trends in the prices of tradable and non - tradable items. over long periods of time, the prices of nontradables – which are mostly services – have tended to rise more quickly than the prices of tradables – which are mostly goods. for example, over the past decade the average annual increase in the prices of non - tradables was 3¾ per cent, while the average increase in the prices of tradables ( excluding food and fuel ) was much lower, at just ¾ per cent. the primary reason for this difference is the faster rate of productivity growth in the production of goods than in services. looking at the recent inflation data, we can see that this difference is currently quite large ( graph 10 ). one very concrete example of this can be seen in divergent movement in the price of health services – a non - tradable – which has increased by 6 per cent over the past year, and the price of clothing – a tradable – which has fallen by 3 per cent over the same period. graph 10 the recent decline in the prices of tradables reflects the appreciation of the exchange rate that i noted earlier, as well as tariff cuts at the beginning of 2010, and discounting by retailers in the face of subdued growth in retail sales over the past year. looking ahead, these factors are likely to continue to contribute to low rates of tradables inflation for some time yet. for non - tradables, the picture is somewhat different, with year - ended rates of inflation picking up recently. this is partly explained by a number of specific factors that

more tranquil times. while financial markets have been turbulent, the recent data on economic activity suggest that the global economy is continuing to recover from the sharp downturn in late 2008 and early 2009. in its latest update, the imf is forecasting that the world economy will expand by 4¼ per cent in 2010 ( graph 1 ). this is a much better outcome than was expected 12 months ago, when the imf was forecasting growth of just 2 per cent. at the time, the outcomes that we have seen recently were viewed as a possible “ upside risk ”, although most observers thought the likelihood of this risk materialising was quite low. the main focus at the time, as it has been over the past week, was on the possible downside risks which were seen to be both very real and very serious. graph 1 we now know that the various policy measures that were taken did help arrest the collapse of confidence following the failure of lehman brothers. these measures on the fiscal, monetary and financial fronts provided reassurance that policymakers would not stand on the sidelines. in doing so, they helped reduce the extreme risk aversion that was evident at the time. they also had the more traditional effect of directly supporting spending in the economy when many people were reluctant to spend. while the global economy is recovering, the recovery has been quite uneven to date. in asia, it has been v - shaped, but in the countries of the north atlantic, particularly those in europe, it has been subdued ( graph 2 ). output remains below the level it reached in 2008 and, in many countries, it will still be some time before that earlier peak is reached again. graph 2 china continues to be at the forefront of the recovery. growth over the first few months of 2010 was strong, and recent indicators suggest that this momentum has continued. investment in the manufacturing sector and in infrastructure has, if anything, surprised on the upside ( graph 3 ). the main issue continues to be the potential for the chinese economy to run too hot, putting upward pressures on the prices of goods and services and on housing prices. recently, the chinese authorities have been responding to this risk, especially through steps to rein in the property market. graph 3 the picture is broadly similar elsewhere in asia, where there has been a sharp recovery in industrial production and exports ( graph 4 ). policy settings in the region remain stimulatory, particularly when viewed against the v - shaped recovery. over the past