Eurozone | Near-term upside risks for inflation are on the rise

The upside risks to our above-consensus view on eurozone inflation in 2021 are rising. However, we think that this primarily reflects the odds of a more frontloaded bout of reflation as the economy reopens. Risks of a more sustained pick-up in inflation beyond 2021 still appear low, given the region’s ample spare capacity and a gradual labour market recovery keeping a lid on wage growth.

What you will learn:

• Headline inflation has picked up over the last few months, but that is primarily being driven by energy prices. Underlying inflation has not yet returned to its subdued pre-pandemic levels and remains closer to last year’s lows.
• Pent-up demand, rising commodity prices, and supply bottlenecks could send some goods prices soaring this year.
• It’s also feasible that hospitality firms might aggressively raise prices on reopening, rather than wait for demand to recover later this year. More definite signs of either would lead us to upgrade to our 2021 inflation forecasts.