observers, but it was the “ official ” series published by the commerce department, and it was referred to by the federal open market committee ( fomc ) in its policy deliberations. it does not surprise me that forecasters took several years to catch up to the adverse developments in trend productivity and the demographic factors that boosted the nairu ; in the 1990s, we took a while to realize the implications of favorable movements in both variables even though we were aware from the experience of the 1970s that such changes were possible. moreover, the oil price shocks, analysis of which was not part of the standard tool kit of economists forty years ago, complicated matters considerably. for a variety of reasons, then, forecasters consistently underpredicted the future level of inflation, seeing considerably more disinflation from a particular policy stance than in fact occurred. this underprediction was true for the board staff ’ s outlook prepared for each meeting of the fomc, in which inflation forecast errors persisted for some time, and it was also true for the bond market, as realized real interest rates, even at longer maturities, were very low or negative. these experiences formed the backdrop for the fomc ’ s october 6, 1979, adoption of a policy targeting the monetary aggregates, a policy whose particular characteristics can be seen as originating from three observations about the 1970s. first, inflation was far too high ; it was corroding the economic system ; and it was the central bank ’ s responsibility to bring it under control. second, under the circumstances, economic forecasts had proved to be essentially worthless as a basis for setting monetary policy, so the central bank had to try a different approach for re - establishing price stability – namely, targeting the medium - term growth of the money supply. the third observation was that part of the problem with policy had been its excessive gradualism, possibly to some degree a reaction to political and public pressure. because interest rates would probably have to move quite a bit to bring inflation down and no one at the time knew by how much, rate movements needed to be less discretionary ; one way to achieve this was by changing the focus of policy to rates of money growth. the memory of the 1970s and the subsequent disinflation are very much alive at the federal reserve and, i suspect, at every other central bank. what major lessons have we drawn from that era? first, low and stable inflation – effective price stability – is a necessary

over recent months mostly reflects higher energy prices. during the second half of this year some further slight increases in hicp inflation cannot be excluded. looking further ahead, inflation rates should overall remain moderate. upward pressures on commodity prices may persist, while euro area domestic price pressures are expected to remain low. 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. this assessment is also reflected in the june 2010 eurosystem staff macroeconomic projections for the euro area, which foresee annual hicp inflation in a range between 1. 4 % and 1. 6 % for 2010 and between 1. 0 % and 2. 2 % for 2011. compared with the ecb staff projections of march 2010, the ranges have been adjusted somewhat upwards, mainly reflecting higher euro prices for commodities. available forecasts from international organisations provide a broadly similar picture. risks to the outlook for price developments are broadly balanced. upside risks over the medium term relate, in particular, to the evolution of commodity prices. furthermore, increases in indirect taxation and administered prices may be greater than currently expected, owing to the need for fiscal consolidation in the coming years. at the same time, risks to domestic price and cost developments are contained. overall, the governing council will monitor closely the future evolution of all available price indicators. turning to the monetary analysis, the annual growth rate of m3 was unchanged at – 0. 1 % in april 2010. the annual growth rate of loans to the private sector increased somewhat further and turned positive, but remained weak at 0. 1 %. together, these data continue to support the assessment that the underlying pace of monetary expansion is moderate and that inflationary pressures over the medium term are contained. shorter - term developments in m3 and loans have remained volatile and, given the renewed tensions in some financial market segments, volatility in m3 and its components may well continue. the actual growth in m3 continues to understate the underlying pace of monetary expansion, but the downward impact of the rather steep yield curve and the associated allocation of funds to longer - term deposits and securities outside m3 appear to be gradually waning. the same holds for the shifts within m3 that have been observed as a response to the narrow spreads between the interest rates paid on different m3 instruments. at 10. 7 %, annual m1 growth is still very strong. the still weak annual growth rate of bank loans to