, the slope of headline inflation had a general tendency to decrease until 2011, after which it rebounded ( see the left - hand chart in figure 8 ). for core inflation the upward shift started earlier ( see the right - hand chart in figure 8 ). this is true for the euro area as a whole but particularly valid for some countries that experienced longer recessions and made greater efforts to reform their product and labour markets with an impact on nominal rigidities. figure 8 bis central bankers ’ speeches some variation is also visible in the estimates of the other parameters, with the weight on expectations increasing over most of the 2000s relative to the level of persistence, and the effect of the exchange rate, but not relative to the level of import prices in us dollars, which slightly increased over time. figure 9 the impact of the change in the central parameter estimates on conditional predictions is not negligible. indeed, estimating this model with constant and with timevarying parameters and feeding it with technical assumptions based on the june ecb staff macroeconomic projections for import prices, exchange rates and the measure of slack ( i. e. the unemployment rate, as the gap is estimated endogenously within the model ), as well as for projected inflation expectations, yields a significantly steeper profile for inflation excluding food and energy over the next two - and - a - half years ( figure 10 ). the steepening of the phillips curve also helps improve its ability to fit the low inflation episode, together with the use of measures that indicate wider negative slack and short - to medium - term survey inflation expectations. figure 10 bis central bankers ’ speeches conclusions inflation dynamics since the great recession have shown signs of instability that have led to a sequence of systematic forecast errors. the two puzzles of “ missing disinflation ” and successive “ excessive disinflation ” triggered a surge of new research around the phillips curve and its possible demise, which seems to have been prematurely foretold. there is an important common factor in inflation in the advanced economies that helps explain national inflation dynamics. the current phase of low inflation, aside from commodity price developments, is significantly influenced by negative demand shocks both at the global and national level. in particular, the recent low inflation in the euro area was largely triggered by domestic demand weakness, which probably led to a larger degree of economic slack than was predicted by the usual methods. the phillips curve seems to survive the recent reassessment and is still a valid tool of analysis in the euro

##ommodative monetary policy stance and the measures adopted to improve the functioning of the financial system. however, the recovery in activity is expected to be dampened by the process of balance sheet adjustment in various sectors. in the governing council ’ s assessment, the risks to this economic outlook are still slightly tilted to the downside, while uncertainty remains elevated. on the one hand, global trade may continue to grow more rapidly than expected, thereby supporting euro area exports. moreover, strong business confidence could provide more support to domestic economic activity in the euro area than is currently expected. on the other hand, downside risks relate to the tensions in some segments of the financial markets and their potential spillover to the euro area real economy. further downside risks relate to renewed increases in oil and other commodity prices, protectionist pressures and the possibility of a disorderly correction of global imbalances. with regard to price developments, euro area annual hicp inflation was 2. 4 % in january 2011, according to eurostat ’ s flash estimate, after 2. 2 % in december. this further increase was broadly anticipated and largely reflects higher energy prices. looking ahead to the next bis central bankers ’ speeches few months, inflation rates could temporarily increase further and are likely to stay slightly above 2 % for most of 2011, before moderating again around the turn of the year. overall, we continue to see evidence of short - term upward pressure on overall inflation, mainly owing to energy and commodity prices. such pressure is also discernible in the earlier stages of the production process. these developments have not so far affected our assessment that price developments will remain in line with price stability over the policy - relevant horizon. at the same time, very close monitoring is warranted. inflation expectations over the medium to longer term continue to be firmly anchored in line with the governing council ’ s aim of keeping inflation rates below, but close to, 2 % over the medium term. risks to the medium - term outlook for price developments are still broadly balanced but, as already indicated in january, could move to the upside. currently, upside risks relate, in particular, to developments in energy and non - energy commodity prices. furthermore, increases in indirect taxes and administered prices may be greater than currently expected, owing to the need for fiscal consolidation in the coming years, and price pressures in the production chain could rise further. on the downside, risks relate mainly to the impact on inflation of potentially lower growth, given the prevailing uncertain