income and thus consumption. in addition, external as well as domestic demand should increasingly benefit from the effects of the significant macroeconomic stimulus under way as well as from measures taken to restore the functioning of the financial system both inside and outside the euro area. taking these effects into account, we see the risks to this outlook for economic activity as being broadly balanced. on the one hand, there may be stronger than anticipated positive effects due to the decrease in commodity prices and to policy measures taken. on the other hand, there are concerns that the turmoil in financial markets could have a stronger impact on the real economy, as well as that protectionist pressures could intensify and that there could be adverse developments in the world economy stemming from a disorderly correction of global imbalances. annual hicp inflation has fallen further, from 1. 2 % in february to 0. 6 % in march, according to eurostat's flash estimate. as explained on earlier occasions, the decline in inflation since last summer primarily reflects the sharp fall in global commodity prices over this period. moreover, signs of a more broad - based reduction in inflationary pressure are increasingly emerging. looking ahead, base effects stemming from past energy price effects will play a significant role in the shorter - term dynamics of the hicp. accordingly, we expect to see headline annual inflation rates declining further in the coming months and temporarily reaching negative levels around mid - year. thereafter, annual inflation rates should increase again. such short - term movements are, however, not relevant from a monetary policy perspective. looking further ahead, over the policy - relevant horizon, annual hicp inflation is expected to remain below 2 % in 2010, reflecting mainly ongoing sluggish demand in the euro area and elsewhere. available indicators of inflation expectations over the medium to longer term remain firmly anchored in line with the governing council's aim of keeping inflation rates at levels below, but close to, 2 % over the medium term. the risks surrounding this outlook are broadly balanced. they relate in particular to the risks to the outlook for economic activity as well as to risks to commodity prices. turning to the monetary analysis, the latest data confirm the high month - to - month volatility of developments in m3 and its components observed since the intensification of the financial turmoil in september 2008. looking through this volatility, the pace of monetary expansion in the euro area has continued to decelerate markedly and supports the assessment of diminishing risks to price stability in the

inflation rate and the subdued prospects for inflation over the medium term? our analysis points to three temporary factors that are acting to push up inflation today but are projected to fade over the course of next year. first, the pandemic initially exerted powerful downward pressure on inflation. in part, this was due to the severe drop in economic activity during 2020 ; in part, some policy measures directly contributed to lower inflation in 2020, especially the temporary vat cut in germany. the economic recovery during 2021 and termination of temporary tax cuts has operated in the opposite direction, temporarily pushing up the inflation rate. in particular, the base effect of unusually - low prices during 2020 has contributed to higher inflation during 2021, but these unusually - low prices will fall out of the inflation calculation ( which compares prices today with prices twelve months ago ) at the end of this year. in terms of individual factors, the reversal of the temporary german vat cut is a quantitatively - important component that will no longer feature in the data in the new year. 1 second, inflation pressures related to bottlenecks can in part be attributed to the unexpectedlystrong european and global recovery from the pandemic shock. in the june 2020 eurosystem staff macroeconomic projections, it was foreseen that euro area gdp for 2021 would remain 4 percentage points below the 2019 pre - pandemic level ; in the latest september 2021 projections, 1 / 4 bis central bankers'speeches euro area gdp for 2021 is foreseen to run only 1. 8 percentage points below the 2019 level. similarly, at the global level, the june 2020 update to the imf world economic outlook ( w eo ) forecast assessed that world gdp in 2021 would barely exceed the 2019 level ( by 0. 2 percentage points ), whereas the october 2021 w eo puts global output in 2021 at 2. 6 percentage points above the 2019 level. the performance is much stronger than initially expected, which can be attributed to the success of vaccination campaigns and other public health measures, together with extensive policy support around the world. however, a by - product of an unexpectedly - strong recovery is that there have been extensive demand - supply mismatches in the global markets for commodities and manufactured goods, which have been exacerbated by some sector - specific supply disruptions ( including in the semi - conductor industry ). there are also mis - matches in some segments of domestic labour markets, especially in those services sectors that suffered the most from the