Global | An era of higher inflation in Europe?

Summary

The sharp upturn in global and European inflation is raising questions in the business press and the general public about a problem we had forgotten about for many years.

Key points

• Key points:
• Over the past three decades global inflation spikes were triggered by supply shocks usually linked to the price of oil and had no second-round effects worth noticing.
• The situation has changed since the spring of 2021 with the re-emergence of an inflation challenge that had seemed to be a thing of the past. The conjunction of several factors, at first thought to be temporary, created a perfect storm behind the price spike.
• In the United States, inflation rates reached 7% in December. In Europe, the situation is more moderate. Inflation reached 5% in December and 2.7% for core inflation, the former driven mainly by energy (oil and gas). Long-term inflation expectations are also well anchored, and wage pressures are barely in evidence.
• Against this backdrop, almost all analysts agree that inflation will slow down this year, both in the United States and in Europe. The question is, how much and at what pace? Forecasts suggest that it will be sooner in the Eurozone, where the starting-point is lower, the cumulative base effects are larger and the fiscal stimulus is more moderate.
• Central banks will have to relearn the old art of striking a balance that avoids high inflation rates, excessively strong financial stresses and the abrupt slowdown of activity. These are the risks we will face.

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