at this stage also derives from the indirect effects on inflation of cost pressures in the production chain. in addition, there is a concern that second - round effects could materialise if consumers or firms attempt to compensate for any loss in purchasing power stemming from the increase in commodity prices by pushing for higher wages or prices. available evidence on price and wage - setting behaviour in the euro area suggests some cause for concern in two respects : • first, the indirect impacts on inflation have been strong, given both the scale of the rise in energy and food prices and the fact that these commodities are an extensive input into the production of other goods and services. strong producer price inflation was not confined to the direct energy and food price components of producer prices. indirect effects have also been visible at the retail level, most notably in areas with a strong link to energy and food prices, such as the transport and restaurant and cafe components. ultimately, the extent to which price pressures at early and intermediate stages of production feed through the production chain and up to the retail level crucially depends on the pricing behaviour of firms. an important factor here is the extent of competition in product markets, which obviously serves to reduce the pricing power of individual firms. • second, labour costs exhibited a clear acceleration in the first half of this year. a pick - up in the growth rate of wages at a time when labour productivity growth is decelerating has resulted in a significant increase in unit labour costs. it is imperative to avoid broad - based second - round effects in wage as well as pricesetting. in this context, the ecb has repeatedly expressed its concern about the existence of schemes in which nominal wages are indexed to consumer prices. such schemes involve the risk of upward shocks in inflation leading to a wage - price spiral, which would be detrimental to employment and competitiveness in the countries concerned. as for the prospects for inflation, on the basis of current commodity futures prices the annual hicp inflation rate is likely to remain above a level consistent with price stability for some time, moderating gradually during the course of 2009. taking into account the recent substantial decline in commodity prices, together with the substantial weakening in demand which has emerged lately, upside risks to price stability have diminished. taking this environment into account and, particularly also the fact that inflation expectations have significantly diminished, the governing council has decided to diminish rates by 50 basis points on 8th of october. assuming that the new information which is progressively becoming available since then and until our next

average euro area cumulative increase of around 14 %. in spain, unit labour costs grew in total by around 26 % over this period, compared with less than 2 % in the case of germany and around 4 % in the case of austria. differing developments in unit labour costs across the euro area countries from 1999 to 2007 appear to be largely the result of differences in the growth rates of compensation per employee. however, in a few countries, including spain, the cumulated productivity growth rate over the nine - year period of reference appears to have been outstandingly low, also contributing to above average increases in unit labour costs. persistent differences in labour cost developments have important implications for the price and cost competitiveness of individual countries and, therefore, an impact on a country ’ s current account balance through labour costs per unit of output, which are usually computed as compensation per employee divided by labour productivity. the export channel. most of the euro area countries that experienced a sizeable loss in price and cost competitiveness over the period 1999 - 2007 appear to have also seen a worsening in their current account positions. in particular, in spain, the current account reached a deficit of 10 % of gdp. three main factors can explain relatively strong cumulated labour cost or price increases in individual countries. first, there are factors that can be linked to the real convergence and economic integration process of a country. in practical terms, however, it is extremely difficult to disentangle the portion of the price and labour cost differentials that may reflect an adjustment to a new equilibrium level. second, a lack of flexibility in product and labour markets can create, in the case of adverse shocks, persistent relative price and cost increases in the countries affected. the close link between the persistence of wages and inflation may be related to institutional features, such as the presence of some form of automatic price indexation of wages which continues to exist in some countries, including spain. and third, an economy can suffer a long period of strong demand pressures. these pressures may initially be related to either country - specific demand shocks or an excessive reaction to common shocks, which are then exacerbated by overly optimistic expectations on the part of consumers or firms regarding future income prospects. this situation may be further intensified by an insufficiently tight fiscal stance. such a situation is likely to lead to an inflationary process and cumulated losses in competitiveness. moreover, the impact may be seen not only on goods and services prices but also on asset price inflation, notably