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Central banks to look through higher inflation

Energy price base effects will drive up inflation in the first half of 2021, but central banks will look through this. Indeed, in most cases, inflation should be around or below target over the second half of 2021 and 2022. Even with vaccine rollouts from early next year boosting demand, most economies will still operate below potential for some time yet. Goods shortages should ease as industrial recoveries make further headway. And the roll-back of virus-related restrictions – which put a floor under inflation this year – should limit how far inflation will rise in the next two Further ahead, there is a chance that the crisis turns out to be the catalyst for an institutional slide towards accepting higher inflation. This risk is higher in the US and various EMs but is unlikely to materialise in the euro-zone and Japan.

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