ECB projects inflation increase in the Euro Zone in the coming months

The European Central Bank (ECB) expects inflation in the Euro Zone to rise further in the coming months and decline again next year.

Meanwhile, inflation in the euro area was 1.9% in June.

So far, the increase is being driven largely by higher energy prices and by the basic effects of the sharp drop in oil prices at the start of the pandemic and the impact of the temporary VAT reduction in Germany on last year.

In early 2022, the ECB projects, the impact of these factors should disappear as they are left out of the calculation of year-on-year inflation.

In the short term, the significant slack in the economy is holding back underlying inflationary pressures.

From this central bank’s perspective, stronger demand and temporary cost pressures in the supply chain will put some upward pressure on prices.

But he noted that weak wage growth and the previous appreciation of the euro mean that price pressures are likely to remain subdued for some time.

Inflation in the Euro Zone

There is still a long way to go before the consequences of the pandemic on inflation are eliminated.

As the economy recovers, supported by the monetary policy measures of the Governing Council, inflation is expected to increase in the medium term, although it remains below the ECB’s target.

While longer-term measures of inflation expectations in the Eurozone have risen, they are still some distance from the ECB’s 2% target.

Risks evaluation

The Governing Council considers the risks to the economic outlook to be broadly balanced.

Economic activity could exceed the ECB’s expectations if consumers spend more than is currently expected and more quickly take advantage of the savings they have accumulated during the pandemic.

A more rapid improvement in the pandemic situation could also lead to a stronger expansion than is currently anticipated.

But growth could fall short of expectations if the pandemic intensifies or if supply shortages turn out to be more persistent and slow production.