The European Central Bank (ECB)sounded a fresh inflation warning yesterday, issuing forecasts based on new methodology that showed prices rising above its 2 per cent annual target rate until at least early 2009.

The projections, based on the supposed predictive power of money supply measures, highlighted the ECB's anxieties about inflation trends in the 12-country euro zone. These have led it to increase interest rates three times since last December.

The ECB defines price stability as an inflation rate "below but close" to 2 per cent. Following the tradition of Germany's Bundesbank, it puts considerable emphasis on measures such as M3, a broad money supply measure, as indicators of longer-term inflation trends.

Yesterday's forecasts, published in its monthly bulletin, reflected that school of economic thought. The ECB said that since mid-2003 such forecasts had "more or less consistently" shown inflation remaining above 2 per cent in the following three years.

The ECB has been keen to reiterate its monetarist credentials since Otmar Issing - the former Bundesbanker who was the architect of its monetary policy strategy - stepped down last month as its chief economist. Fears that central banks would react to inflation concerns with higher interest rates have upset financial markets in recent weeks.

However, the ECB admitted that its analysis was "very much work in progress". Jean-Claude Trichet, ECB president, said last week that such forecasts were "not underwritten" by the ECB's executive board and added: "We clearly have more work to do in this particular domain."

At the same time, official inflation data yesterday, showing underlying inflationary pressures easing last month, suggested the ECB might be fretting unnecessarily.

While high oil prices pushed the headline inflation rate up to 2.5 per cent in May, "core" euro zone inflation - excluding volatile energy and unprocessed food costs - fell to 1.5 per cent from 1.6 per cent in April, according to Eurostat, the European Union's statistical office. On a different measure, "core" inflation fell to just 1.3 per cent.

The ECB bulletin noted that euro zone wage dynamics had "remained moderate in early 2006".