Mr. Gavin Sweeney:

The next chart shows the quarterly composition of the HICP - harmonised index of consumer prices - which is the Europe-wide measure of inflation, allowing comparisons between different eurozone countries. The story in 2013 has been broadly of modest services inflation. We can take services generally as a measure of domestically-driven inflation, whereas goods can be taken as a proxy for imports inflation. Services have recorded modest inflation in the year to date, whereas there has been a drag on the inflation rate of goods exports over the three quarters. This largely reflects bilateral exchange rate movements vis-à-vis sterling in the first quarter of the year, so we see that deflationary effect kick into goods. When we compare 2013 to last year, we see more benign energy price inflation. It has been about 1% in the year to date, whereas it was about 9% last year. We are broadly expecting HICP inflation this year to be somewhere in the region of 0.7%, picking up over the next year based on a number of assumptions, including a fall in the exchange rate impact. The projection of a rise in services inflation is mostly based on an assumption of a reversal of the jobs initiative VAT reduction for tourism, so it is conditional on that. We are expecting a HICP rate of about 1.5% for next year.

When we forecast inflation, we tend to use a bottom-up approach. When we use more granular data we can measure product-specific developments, but we test the robustness of our forecasts by using this top-down approach, and this is broadly in line with what we forecast in the bottom-up approach. This does not take into account budgetary measures such as the VAT increase, so that explains the differential there.