as inflation falls further, household real incomes recover and the demand for euro area exports picks up, the economy should strengthen over the coming years. economic activity has so far been supported by the strength of the labour market. the unemployment rate stood at a historical low of 6. 4 per cent in august. at the same time, there are signs that the labour market is weakening. fewer new jobs are being created, including in services, consistent with the cooling economy gradually feeding through to employment. as the energy crisis fades, governments should continue to roll back the related support measures. this is essential to avoid driving up medium - term inflationary pressures, which would otherwise call for even tighter monetary policy. fiscal policies should be designed to make our economy more productive and to gradually bring down high public debt. structural reforms and investments to enhance the euro area's supply capacity – which would be supported by the full implementation of the next generation eu programme – can help reduce price pressures in the medium term, while supporting the green and digital transitions. to that end, the reform of the eu's economic governance framework should be concluded before the end of this year and progress towards capital markets union and the completion of banking union should be accelerated. inflation inflation dropped to 4. 3 per cent in september, almost a full percentage point lower than its august level. in the near term, it is likely to come down further, as the sharp price increases in energy and food recorded in autumn 2022 will drop out of the yearly rates. september's decline was broad - based. food price inflation slowed again, although it remains high by historical standards. in annual terms, energy prices fell by 4. 6 per cent but, most recently, have risen again and become less predictable in view of the new geopolitical tensions. inflation excluding energy and food dropped to 4. 5 per cent in september, from 5. 3 per cent in august. this fall was supported by improving supply conditions, the passthrough of previous declines in energy prices, and the impact of tighter monetary policy on demand and corporate pricing power. goods and services inflation rates fell substantially, to 4. 1 per cent and 4. 7 per cent respectively, with services inflation also being pulled down by pronounced base effects. price pressures in tourism and travel appear to be moderating. most measures of underlying inflation continue to decline. at the same time, domestic price pressures are still strong, reflecting also the growing importance of rising wages. measures of longer - term

inflation and moderate growth. meanwhile, the european central bank is still moving towards looser monetary policy, rather than away from it, as is the bank of japan. the result has been renewed global appetite for risk, leading to currency appreciation for most of the emerging markets which had previously experienced weakening exchange rates. domestic factors seem to have played only a supporting role in driving emerging market currency movements over this period. in south africa, markets appear to have welcomed the responsiveness of monetary policy to rising inflation ; the current account deficit also narrowed somewhat in the last quarter of 2013. but south africa ’ s economic fundamentals have on the whole not changed substantially, nor have markets assessed them differently : the current account deficit remains over 5 % of gdp and growth has deteriorated. it would be very rash indeed to assume that the rand ’ s long depreciation trend is now concluded, and that henceforth a strengthening rand will mitigate inflation. instead, south africa remains vulnerable to further changes in global sentiment, which could be sudden. the other aspect of exchange - rate linked inflation is pass - through. with certain prices, passthrough is quick and complete. the obvious example is petrol prices, which have exerted substantial inflationary pressure despite relatively flat international prices thanks to exchange rate depreciation. but many prices behave differently. in a weak economy, firms may choose to absorb higher import costs rather than pass them on to consumers, leading to a divergence between headline consumer prices and the exchange rate. this seems to have been the pattern from the start of 2011 until early 2014. however, at some point firms will judge that their profit margins have been eroded to an unacceptable degree, and they will start passing on these costs to consumers. we see evidence that firms are being squeezed in producer price inflation, which reached 8. 8 % in april, its highest level in two years. and we see evidence for higher pass - through in rising core inflation, which has picked up again after a period of stability in 2013. our conclusion is that pass - through has risen, pushing inflation above the target. this effect cannot be expected to abate just because the rand has recovered some lost ground. if the currency begins to trade in a stable band well above its old levels, stability will not necessarily moderate pass - through ; rather, it could convince firms to price in the new normal level. we should not assume that inflation will simply track the most recent movement of the exchange rate. bis central bankers ’ speeches 3