Europe

European Economics Update

European Economics Update

“Underlying inflation” still weak

Core inflation in the euro-zone rose to 1.9% in September, its highest level in nearly 13 years, but other measures of underlying inflation are much lower. This supports our view that when the temporary forces pushing up inflation have faded, the core rate will settle well below the ECB’s target.

12 October 2021

European Economics Update

ECB growing more uncertain about inflation outlook

The account of September’s ECB meeting revealed many policymakers believed that inflation may stay higher for longer than the Bank’s projections show. Recent developments have added to the upside risks.

7 October 2021

European Economics Update

Can Europe keep the lights on?

The extraordinary rise in European gas prices in recent weeks has raised the possibility that, as a last resort, European governments may need to ration the supply of electricity to businesses or households. The economic impact of rationing would depend on how deep and long the cuts were, but under plausible assumptions, a few months of power reductions could easily wipe 0.5% off quarterly euro-zone GDP.

7 October 2021
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European Economics Update

Changing HICP weights add to inflation uncertainty

Changes to the weights applied to the goods and services in the inflation basket pushed inflation up in January, but since April the new weights have kept the headline rate lower than it would otherwise have been. The impact of next year’s changes in January is uncertain, but over the course of 2022 they are likely to mean that inflation falls a little more quickly than it otherwise would have done.

5 October 2021

European Economics Update

Households’ excess savings continue to build

Households continued to accumulate “excess” savings in Q2 this year, with those held as cash and bank deposits equivalent to about 4% of GDP. We do not expect all of this to be spent, but some of it will. And it should also provide a small indirect boost to GDP by strengthening households’ balance sheets.

European Economics Update

ECB could claim inflation is “transient” for years

The ECB is likely to argue that the increase in inflation to above its 2% target is “transient” even if it continues for much longer than currently expected. The key question is not how long inflation has been above target but whether it is expected to come back down within policymakers’ forecast horizons.

European Economics Update

Risk of euro-zone labour market “cliff edge” very low

Euro-zone governments’ reduction in support for jobs will not cause unemployment in the region to jump, since there are now relatively few workers benefiting, and hiring activity is strong. But lingering spare capacity in the labour market means worker shortages are unlikely to become widespread.

30 September 2021

European Economics Update

Revising up our euro-zone inflation forecasts

As a result of the increase in gas prices, we now think that euro-zone headline inflation will soon hit 4% and that it will average 2% in 2022. But headline and core inflation still look set to fall over the course of next year, with both settling at uncomfortably low levels for the ECB.

28 September 2021
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