The European Central Bank is expected to send a strong signal on Thursday that it is ready to tackle building euro zone inflation pressures but refrain from indicating interest rate increases are imminent.
Inflation in the common currency area has been above the ECB's price stability target of below, but close to 2 percent for the past two months and stood at 2.4 percent in January.
Producer prices rose more than expected in December, boosted mainly by a jump in energy costs, pointing to rising inflationary pressures in the pipeline.
Last month, the ECB toughened its language on inflation dangers, saying very close monitoring of price developments is warranted, and that price risks, while still broadly balanced, could move to the upside.
However, analysts unanimously expect the ECB to keep rates at a record low level of 1.0 percent this month and said the ECB's sharper tone was more about communicating its commitment than preparing markets for a hike soon.
They are moving up the rhetoric to keep inflation expectations at bay and to avoid seeing them drift higher, Unicredit economist Marco Valli said. By barking now, the ECB can afford to act later on rates.
An important clue to how well the 17-country bloc's central bank has succeeded in anchoring inflation expectations is the Survey of Professional Forecasters.
ECB President Jean-Claude Trichet will likely face questions about the survey, even though it will officially be published next week. A rise in inflation expectations to above the central bank's target would increase pressure for it to act.
Financial markets started moving forward their rate hike expectations after the January meeting. Markets now see a chance of a first rate increase coming during the summer, and recent days have seen more price threats gathering.
Trichet has not been alone in talking tough on inflation.
Executive Board member Lorenzo Bini Smaghi followed up by warning against keeping accommodative policy in place for too long, adding that import prices carry an inflationary threat.
Turmoil in Egypt and other Arab states adds to uncertainty about further energy price rises, which have already spiked.
Rising tensions in the Arab world and very elevated readings on various types of inflation measures cannot have made some Governing Council officials more confident in their January view that inflation rates would only temporarily increase further', Schneider Foreign Exchange analyst Stephen Gallo said in a note to investors.
Of crucial importance will be how much of the import price increases seep into domestic prices through higher wages, and this will be discussed in the decision-making Governing Council's meeting, now underway.
As long as energy and food prices do not lead to second round inflationary effects, there is no need for the ECB to react with rate increases, a German government advisor said.
The ECB will observe very closely and in the case second round effects emerge it will react, Wolfgang Franz said.
The euro's rise against the dollar -- the currency in which commodities trade -- has worked in the ECB's favor.
It is up more than 5 percent versus the dollar since the January rate meeting, bolstered by growing expectations that the ECB will be well ahead of its U.S. counterpart in raising rates.
With the bulk of euro zone inflation coming from imports, the rising euro should weaken inflationary pressures.
Increasing expectations of interest rate rises have also brought the issue of ECB code words back to forefront, used in the last rate raise cycle as a traffic light system.
The use of 'strong vigilance' was the signal the ECB were very likely to raise rates the following month, RBS economist Nick Matthews said in a note.
Markets should be on alert for any phrase resembling 'strong vigilance' or the more recent incarnation of 'heightened alertness' if the ECB were seriously signaling an early rate hike, he said, adding he did not expect to see this before July at the earliest.
Trichet can also expect to be grilled on the significance of higher market interest rates and whether he sees this as lessening the need for policy rate increases.
(Reporting by Sakari Suoninen, editing by Mike Peacock)