Inflation to remain above target in 2022

Euro-zone inflation reached 5.0% in December, which is likely to be the peak. Unless oil and gas prices surge again in 2022, which seems unlikely, energy inflation will plummet – we forecast the contribution of energy to headline inflation to drop from 2.5 percentage points in December 2021 to around zero in December 2022. But we don’t expect to see a downward trend in core inflation. The full impact of high input prices has probably not yet fed through to core goods inflation, which was already at a record high at the end of last year. In the near term, the Omicron variant could lead to a bigger reduction in global supply than demand, adding to inflationary pressures. And if demand rebounds when Omicron cases start to fall, as we expect, it could push up wage growth and services inflation. We forecast core inflation to average a little over 2% this year, which would put more pressure on the ECB to prepare the ground for interest rates to rise in 2023.