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.
Jack Allen-Reynolds Senior Europe Economist
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European Economics Weekly

Rising Covid fears will keep policymakers dovish

It is too early to judge how serious the B.1.1.529 variant will turn out to be, but it certainly reinforces the case for central banks to be ultra-cautious when withdrawing their policy support. We now think that at its next meeting, the ECB will make clear that even if it intends to end net PEPP purchases in March, it stands ready to start them again if needed. That in turn should help to keep bond yields and spreads low. Meanwhile, we are braced for some “shock” inflation numbers next week, but they should mark the peak and inflation is likely to fall quite sharply next year.

26 November 2021

European Economics Update

PEPP not guaranteed to end in March

The account of October’s ECB meeting suggests that it is by no means guaranteed that net PEPP purchases will end in March. And even if they do, the Bank may well leave open the possibility of re-starting PEPP purchases later in 2022 if needed. Meanwhile, we agree with the ECB’s message that investors have got ahead of themselves by pricing in interest rates hikes for next year.

25 November 2021

European Data Response

German Ifo Survey (November)

The fall in the Ifo Business Climate Index (BCI) for November was in line with expectations and suggests that the German economy was struggling even before the recent tightening of Covid restrictions. Things will be much worse in December as coronavirus restrictions are tightened further.

24 November 2021

More from Jack Allen-Reynolds

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.

4 October 2021

European Data Response

Euro-zone Flash HICP (Sep.)

Euro-zone inflation looks set to continue on its upward trend and we think it will soon hit 4%. That makes it more likely that the ECB will scale back its asset purchases substantially in March. But we still expect headline and core inflation to fall sharply in 2022 and to settle well below 2% in 2023.

1 October 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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