Euro-zone HICP Inflation (Feb. 2021) - Capital Economics
European Economics

Euro-zone HICP Inflation (Feb. 2021)

European Data Response
Written by Jack Allen-Reynolds

After euro-zone inflation held steady in February, it looks set to rise over the rest of the year, taking it above the near-2% target. But this will be driven largely by temporary forces so we think it will drop back to around 1% in 2022, and the ECB will look through the temporary inflation overshoot.

Inflation to rise above 2%

  • After euro-zone inflation held steady in February, it looks set to rise over the rest of the year, taking it above the near-2% target. But this will be driven largely by temporary forces so we think it will drop back to around 1% in 2022, and the ECB will look through the temporary inflation overshoot.
  • Headline inflation was unchanged at +0.9% in February, which was lower than our estimate and the consensus forecast. While energy inflation rose as expected, from -4.2% to -1.7%, that was more than offset by a decline in the core rate (excluding food, energy, alcohol and tobacco) from +1.4% to +1.1%.
  • We knew that core goods inflation would fall because it had been boosted temporarily in January by cancelled winter clothing sales. The decline in core goods inflation from 1.5% in January to 1.0% in February is consistent with the winter sales effect having been at least partly reversed. (See Table 1.)
  • The surprise in today’s release was that services inflation edged down, from 1.4% to 1.2%. We had assumed that transport services inflation would rise, as it has a close association with oil prices. We won’t know what caused services inflation to fall until the detailed breakdown is published in two weeks’ time.
  • Looking ahead, energy inflation will continue to increase very sharply in the coming months, while a long list of shortages from semiconductors to steel suggests that core inflation will increase too. And later in the year as virus restrictions are relaxed, the prices of items that fell most sharply last year – such as clothing and tourism-related services (see Chart 1) – should rebound.
  • As a result, we think that headline inflation will exceed 2% in the second half of the year. But we think the ECB will look through this, as inflation is likely to fall next year. (See Chart 2.) Supply problems should be resolved, holiday and clothing prices should have largely recovered to pre-crisis levels, and energy inflation will fall. Meanwhile, the hit from the pandemic to employment, incomes and confidence should mean that aggregate demand remains weak. So the ECB will keep policy loose to support the recovery.

Chart 1: Euro-zone Accommodation
Services Inflation (%)

Chart 2: Euro-zone HICP Inflation (%)

Source: Refinitiv

Sources: Refinitiv, Capital Economics

Table 1: Euro-zone Harmonised Consumer Prices (% y/y)

2020

2021

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Headline inflation

1.2

0.7

0.3

0.1

0.3

0.4

-0.2

-0.3

-0.3

-0.3

-0.3

0.9

0.9

Food, alcohol, & tobacco

2.1

2.4

3.5

3.4

3.1

2.0

1.7

1.8

2.0

1.9

1.3

1.5

1.4

Energy

-0.3

-4.5

-9.7

-11.9

-9.3

-8.4

-7.8

-8.2

-8.2

-8.3

-6.9

-4.2

-1.7

Non-energy industrial goods

0.5

0.5

0.3

0.2

0.2

1.6

-0.1

-0.3

-0.1

-0.3

-0.5

1.5

1.0

Services

1.6

1.3

1.2

1.3

1.2

0.9

0.7

0.5

0.4

0.6

0.7

1.4

1.2

Core (ex.energy,food,alc.,tob.)

1.2

1.0

0.9

0.9

0.8

1.2

0.4

0.2

0.2

0.2

0.2

1.4

1.1

Source: Refinitiv


Jack Allen-Reynolds, Senior Europe Economist, jack.allen-reynolds@capitaleconomics.com