The latest data suggest that the increase in inflation is becoming more broad-based and persistent. While headline inflation only edged up in April, the core measure jumped to 3.5%. A range of alternative measures of underlying inflation, including our own proprietary indicator, also rose sharply. Surveys suggest that businesses and households have been revising up their inflation expectations, and this is echoed in market-based measures of inflation expectations. All of this has prompted financial markets to come round to our view that the ECB will raise its deposit rate by 25bps in July and lift it to positive territory by the end of the year. We now see the risks to our forecast as tilted to the upside. Attention is soon likely to turn to how tighter monetary conditions will impact the real economy and whether they will cause an excessive widening of sovereign bond spreads.
UK Drop-In (5th May 10:30 EDT/15:30 BST): Our UK Economics team are holding a special 20-minute briefing to discuss the latest MPC decision and what it means for their outlook for UK growth, inflation and BoE policy. Register now
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