or only to look at non - imported inflation and to ignore the rest. this strategy is complex because first and foremost it is not clear how much the imported inflation rate will be going forward, which is not under the control of the central bank. in addition, an upward revision risks bringing a loss of credibility and of being interpreted as a change in strategy. moreover, a higher inflation objective implies an increase in inflation expectations, and thus of long - term interest rates, which must sooner or later be accompanied by an increase in short - term rates. finally, if the inflation rate objective is increased it will not be easy to convince national market participants not to include this increase in their behaviour, including in wage demands. in a situation of high unemployment, this risk is limited, but gradually as the economic recovery gets under way the risk of second - round effects increases. alternatively, the central bank may decide to maintain the inflation objective unchanged at 2 % ( or less ). in this case, since the contribution of imported inflation is 1. 2 %, this means that domestic products must not increase by more than 1 % per year. in other words, to be consistent with inflation at 2 %, core inflation, or excluding food and energy, should be 1 %. how do you get this result? by focusing monetary policy on domestic inflation of 1 %. this can be accomplished through a moderation in costs and prices by producers. this does not necessarily mean a loss of purchasing power, if productivity increases at a pace comparable with imported inflation. however, if this does not happen, the only way of ensuring price stability is to restrict the purchasing power of wages. this requires that price increases for imported goods do not feed into wages and domestic prices. the numbers i have used are of course by way of illustration and should not be related to the current ones. the point i want to make is that if the growth gap continues between the developed and emerging markets, inflation imported from the latter cannot be ignored. normally, higher inflation in the rest of the world should be compensated for by an exchange rate appreciation of the domestic currency vis - a - vis the rest of the world. but this only happens in the case of countries with comparable economic structures. in this case, however, the exchange rates of the advanced countries tend to fall compared with those of emerging countries, because of higher productivity growth in the latter group. these two effects, higher external inflation and depreciation, accumulate and lead to a loss in the

grow in line with global demand, unless technological innovations are such that they lead to changes which offset the quotations. unlike the previous decade, the process of reducing the prices of manufactured goods imported from developing countries seems to have ended, particularly in respect of products imported from china. the gradual appreciation of the exchange rates of these countries should further affect the prices of products imported from advanced countries. in summary, to a greater extent than in the previous decade, the strong dynamics of the rest of the world are likely to result in a higher inflation rate for imported goods, whether commodities or manufactured goods and services. this effect can be partly mitigated by the ability to shift the production of imported goods to new countries with lower labour costs, or even to bring production back to the advanced countries that have regained productivity, provided they manage to contain their cost dynamics. in any case, a permanent and repeated increase in the prices of imported products will tend to impact on inflation in the advanced countries, including the euro area. this effect occurs through two channels. the first is simply mechanical, by the weight of imported goods in the bis central bankers ’ speeches basket of goods and services purchased by households. for example, food and energy account for about 30 % of the average shopping basket in the euro area. assuming an average increase of these products by 4 % a year, more or less in line with the rate of growth of the world economy ( or long - term interest rates, according to the hotelling rule ), average prices in the euro area will increase by 1. 2 % only because of the effect of these products. it is therefore not a component that can be ignored, as it would be if core inflation were used as a reference. this concept is obviously losing its relevance in a global world. the second effect concerns the implications for prices of other products, making up 70 % of the basket, and which include manufactured goods and services, some of which are imported and others are produced domestically. assume, for simplicity ’ s sake, that these goods are only produced domestically. if the prices of these products grow at a rate of 2 % per year, overall average inflation is 2. 6 %, exceeding the 2 % objective of most central banks in advanced countries, including the ecb, which aims for inflation of below but close to 2 % over the medium term. the central bank is therefore faced with two alternatives. the first is to revise the inflation rate objective upwards, taking account of imported inflation,