inflation dynamics. the ups and downs of monthly data are not relevant if they are temporary and have no implications for the medium term outlook for price stability. i will focus my remarks today on the relationship between economic activity and inflation. eurosystem staff analysis has identified a large degree of economic slack as an important factor behind subdued inflation dynamics in the wake of the sovereign debt crisis. despite the ensuing economic recovery, other – mainly cyclical – forces have been exerting disinflationary pressures. these forces, which are partly external and partly domestic, have masked the relationship between economic slack and inflation, and have been reinforced by a weakening of inflation expectations. 1 / 5 bis central bankers'speeches forces slowing down inflation in the euro area economy2 the euro area recovery has been characterised by a disconnect between economic activity and inflation – which some have referred to as a “ missing inflation puzzle ”. this disconnect becomes visible, for instance, when comparing actual growth and inflation outcomes for 2016 with those anticipated in the ecb staff macroeconomic projections of march 2014. the real gdp growth rate, which stood at 1. 7 % in 2016, essentially confirmed the march 2014 projection. hicp inflation, by contrast, turned out to be more than 1 percentage point below the rate projected in march 2014 ; and measures of core inflation, which strip out the direct disinflationary impact of the collapse of commodity prices over this period, have remained at 0. 9 %, about half the rate projected earlier. this picture points to pronounced disinflationary forces that have confounded attempts to forecast the impact of improved economic conditions on inflation. where do these forces come from? do they pertain to cyclical influences that monetary policy can offset? do they reflect broader structural shifts in the economy that the central bank is forced to watch as a bystander? when answering these questions, it is useful to subdivide the inflation process into three factors, comprising : first, economic slack, measured by the output or unemployment gaps, for instance ; second, a range of other domestic and global macroeconomic shocks that drive a wedge between that relationship, affecting either production costs or price mark - ups ; and, third, inflation expectations, which feature as the – possibly time - varying – trend in this statistical relationship. following this logic, summarised by the well - known phillips curve, recent research has explored whether the disconnect between inflation and the economic recovery may have derived from

##b should also take greater account than it did in the recent past of economic developments in individual countries? first of all, as you know, the treaty requires us to maintain price stability in the euro area as a whole, not to monitor the economic policies of different countries. this is the task of the eurogroup and of the commission according to the treaty. and we have delivered price stability, which was our treaty responsibility. but since the inception of the euro we have constantly asked the governments individually and collectively to live up to their responsibilities. as i said, we fought to defend the stability and growth pact in 2005 when three main euro area countries wanted to water it down. and since then we have been giving the eurogroup detailed information on the evolution of the competitiveness of member states and we are calling for rigorous monitoring of fiscal and economic policies. 8. in your opinion then, national governments are to blame for the current situation. let ’ s talk about italy. from your perspective, how do you judge the country ’ s efforts in the eight years of your presidency? the italian economy has tremendous potential given the quality of its human resources and its corporate culture. and yet economic growth has been disappointing. for this reason, i believe in particular that structural reforms are necessary to increase the growth potential of an economy held back by too many obstacles – and they prevent it from achieving its full potential. 9. italy has been the subject of intense market turmoil this summer. in this regard, how do you view the recent package of austerity measures proposed by the italian government? these measures decided by the government in its announcement on 5 august are of extreme importance to rapidly reduce public finance deficits and enhance the flexibility of the italian economy. it is therefore of the essence that the overall goal in terms of the public finance improvement that was announced be fully confirmed and substantiated. this is decisive to consolidate and reinforce the quality and the credibility of the italian strategy and of the italian signature. bis central bankers ’ speeches 10. and what about structural reforms? the serious situation in italy, like the dramatic drifting in greece, might it not be linked to an obsolete economic structure, not only to the high public debt? my message is clear : it is essential that all those measures that allow full exploitation of italy ’ s medium and long - term economic potential are introduced. today there is a huge potential that is not tapped as it should be. 11. the message that you sent to the italian government in early