New data confirms prices are rising much more slowly in the eurozone than in other major economies, which may be a curse rather than a blessing.
recent flash estimate for the eurozone saw annual inflation inch above the European Central Bank’s (ECB) 2pc target in July, but that was after a slight fall in June to 1.9pc.
That is only half the rate recorded across the 38-country Organisation for Economic Cooperation and Development (OECD) in June, which saw prices rise two basis points to 4.1pc, according to data published by the Paris-based body on Wednesday.
In the US, inflation is hitting highs of 5pc as oil prices rise and President Joe Biden’s multi-trillion dollar stimulus programme is rolled out.
The ECB predicts eurozone inflation will fall back to around 1.4pc next year, although it could rise well above 2pc in the meantime.
“The rise in inflation here won’t match the [United] States, but I would say the eurozone inflation rate could get to 3pc,” said AIB chief economist Oliver Mangan.
“The big question that markets are asking, that central banks are asking is, regardless of where inflation goes to this year, is it going to be a sustained rise or is it just a once-off temporary phenomenon?”
Pearse Conaty, the head of fixed income at Bank of Ireland global markets, said in a blog post this week that Europe’s growth ambitions appear “more conservative” than the US, which could lead to “economic scarring”.
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“If Europe does not get back on its growth trajectory, it will have permanently higher debt, making it harder to counter future macroeconomic shocks. It is possible that we will have lower inflation and a long lasting shortfall of demand which could see unemployment remain high. The longer factories stay closed and people stay idle, the more economic scarring occurs – lowering potential future growth,” he wrote.
Mr Mangan agreed, saying that pre-pandemic trends point to an endemic problem in the eurozone.
“The eurozone economy hasn’t been characterised by very strong growth in recent years, it has a persistently higher level of unemployment [than the UK and US] and these have all had a dampening impact on price pressures,” he said.
Inflation figures need to be read carefully, as low excise duties in the US mean energy price rises (and falls) feed into inflation data more forcefully.
The US also started reopening its economy far in advance of the EU and the UK, while temporary VAT cuts on this side of the Atlantic last year – including in major economies like Germany’s – are only just unwinding.
But even excluding volatile food and energy costs, prices in the OECD still increased significantly to 3.2pc in June, from 2.9pc in May – the highest rate since March 2002 – while in the eurozone, underlying inflation fell below 1pc in June.
The ECB has indicated it won’t raise interest rates or stop its expanded bond-buying programme until it looks like inflation will hit the 2pc target durably.
Mr Mangan said governments will find it “hard to resist” taking advantage of lower borrowing rates, which he says could be in place for up to three or four years.
“If central banks keep these rates very low, or bond yields remain very, very low, governments are going to find it hard to resist borrowing money, particularly for infrastructural purposes, and they’re probably right to do so,” he said.