The economic outlook has brightened as the virus has subsided and governments have permitted people to return to the shops and restaurants as well as to travel a bit more freely. However, manufacturers are struggling to keep up with booming demand due to shortages of key inputs, and there are some signs that firms in the hospitality sector may struggle to fill vacancies immediately. These frictions may put some upward pressure on prices in the near term. After rising to 2.0% in May, we think the headline inflation rate will average around 2½% in the second half of the year although core inflation remains low. (See Chart 1.) The ECB is not likely to be fazed by these inflation numbers and, in our view, is right to worry more about under-shooting its target over the medium term. We expect the Bank to pare back its PEPP purchases only very gradually in the second half of the year.
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