Euro area: Measuring the euro area inflation pulse

Is the current inflation surge temporary or permanent?

During October euro area HICP inflation surged to a new record high, fuelling market expectations of an ECB interest rate hike during 2022 Rising energy and commodity prices, cost push effects from supply chain bottlenecks, tax changes and re opening effects in services all contributed to the inflation jump observed during 2021 While energy accounts for more than half of the observed price surge, core inflation (which excludes volatile energy and food items) also accelerated during the year, printing above 2 for the first time since 2002 A large part of the observed rise can be attributed to changes in German VAT rates, but in recent months increasing signs for rising underlying inflation have also emerged.

Headline inflation has printed above the ECB’s new symmetric 2 inflation target since July While the new monetary strategy implicitly allows temporary overshoots, markets have increasingly started to price in ECB joining the growing camp of global central bank raising policy rates The question whether inflation will moderate in 2022 and 2023 will be important for ECB policy calibration We continue to see the current inflation spike as largely temporary, but also acknowledge upside risks Is the current inflation surge temporary or permanent? Euro inflation rewind.

Energy price surge shows not signs of abating yet

Rising energy prices has been the predominant driver behind the surge in HICP inflation during 2021. With the significant rebound in oil prices to above USD/bbl 85 (from USD/bbl 15 in Q2 20), base effects have driven inflation rates for transport and liquid fuels higher, as pass-through happens relatively quickly (usually within 3-5 weeks). We do not expect oil prices to continue rising at the same pace as during 2021 and hence expect the tailwind from energy to start to fade next year. That said, Europe’s green transition will probably continue to put upward pressure on energy prices.

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