Price pressures building

Euro-zone inflation looks set to rise sharply in the coming months as energy inflation shoots up and core inflation edges higher. Indeed, the PMI surveys suggest that manufacturing input prices are rising at their fastest pace in nearly a decade, which reflects movements in oil prices as well as a long list of input shortages, from steel to semiconductors. While the PMIs imply that firms aren’t fully passing those cost increases onto customers, some price increases seem likely. What’s more, when lockdowns are lifted, clothing and holiday prices – which fell particularly sharply last year – should rebound too. We think that all of this will drive headline inflation above 2% in the second half of the year. But since most of these effects should be temporary, we expect inflation to drop back to around 1% in 2022.