How long will pandemic price pressures last?

Global supply problems could put some further upward pressure on inflation in the near term, but the increase in inflation experienced in the immediate wake of the COVID crisis is close to peaking and we expect headline inflation to fall back in every major advanced economy in 2022. Underlying price pressures are likely to remain muted in Europe and Japan throughout this year and next. However, a combination of large amounts of fiscal and monetary support, and a longer-lasting drop in the labour force, means that core inflation in the US will remain well above target in 2022.
Jack Allen-Reynolds Senior Europe Economist
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CE Spotlight

The rebirth of inflation?

The debate over inflation has become polarised between those who expect a return to the 1970s and those who believe inflation is still dead. The reality is more nuanced and inflation outcomes are likely to vary between countries. A new era of higher inflation is most likely to emerge in the US and perhaps the UK. But we think inflation will remain extremely low in the euro-zone, Japan and China. In those countries where we anticipate a sustained rise in inflation, the most likely outcome is that it increases to moderately higher rates of 3-4%. But risks are generally skewed to the upside and there is a real possibility that inflation increases to a much higher rate that would, in time, necessitate a more substantial tightening of policy.

30 September 2021

CE Spotlight

What would an era of higher inflation mean for currencies?

We think that a return to a regime of higher and less stable inflation in many major economies would result in a rise in exchange rate volatility and, over time, the depreciation of the currencies of those countries which experience higher inflation.

30 September 2021

CE Spotlight

What would an era of higher inflation mean for markets?

We expect underlying inflation in the US to be significantly higher over the next decade on average than it has been over the last one. Nonetheless, we don’t think that it will climb sharply from here, or that it will coincide with much weaker economic growth or tighter monetary policy. So, in our view, markets will not falter in the way that they did during some periods of high inflation in the past.

29 September 2021

More from Jack Allen-Reynolds

European Economics Weekly

Wage growth to stay weak, inflation to keep rising

Data published this week highlight the challenge to euro-zone consumers from subdued pay growth and rising inflation. We expect inflation to keep rising in the coming months, and probably further than most expect. Next week, we will host a Drop-in webinar on the causes and effects of the recent surge in European gas prices.

17 September 2021

European Data Response

Euro-zone Final HICP (Aug.)

Rising costs – from shipping to energy – are likely to push euro-zone inflation up even further in the coming months. They might also mean that it doesn’t fall quite as quickly next year as we currently assume. But by the end of 2022, we still suspect that inflation will be a long way below the ECB’s target.

17 September 2021

European Economics Weekly

A look ahead to December’s ECB meeting

Following yesterday’s comments from ECB President Christine Lagarde, the Bank looks set to make crucial decisions about the future of QE at its December meeting. We suspect that it will end its net purchases under the PEPP next March, but increase the pace of APP purchases by more than most expect. Interest rates are also likely to remain on hold for longer than is priced into markets. Meanwhile, data from the UK suggest that Covid and shortages of both goods and labour are putting the brakes on the economic recovery there, but we remain cautiously optimistic about the euro-zone outlook.

10 September 2021
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