Eurozone inflation to hit one-year high, unlikely to lift flagging euro – Forex News Preview
Posted on March 30, 2021 at 6:42 am GMTRaffi Boyadjian, XM Investment Research Desk
Inflation in the euro area is expected to hit the highest in more than a year when the flash estimate for March is published on Wednesday (10:00 GMT). Fears of higher inflation have gripped bond markets lately, pushing yields higher and causing undue tightening of financial conditions for Eurozone economies. However, even though inflation may accelerate further in the coming months, the rise is expected to be temporary. Moreover, any revival in price pressures is at risk of being choked off by a sluggish recovery, as Europe has not only fallen behind the race to vaccinate its population, but it is now battling a third wave of the coronavirus. It’s no wonder, therefore, that the euro is languishing at 4½-month lows versus dollar, as the US economic outlook keeps brightening in comparison.
Inflation is creeping higher
After five months of negative prints, the Eurozone’s harmonised index of consumer prices (HICP) jumped to 0.9% year-on-year in January, holding steady in February. HICP is forecast to have risen further in March, to hit a 14-month high of 1.3% y/y, mainly due to the base effect from the drop in inflation a year ago when European economies were shut down and oil prices tanked.
However, underlying measures of inflation are not anticipated to tick higher. Excluding food and energy items, HICP is expected to stay unchanged at 1.2% y/y, while the index that excludes alcohol and tobacco as well is forecast to remain at 1.1%. The European Central Bank pays close attention to the two core rates when trying to predict whether any trend in the headline rate is sustainable or not.
Will the inflation spike be temporary?
After nearly a year of soaring energy prices and supply chain disruptions that are almost certain to feed into higher consumer prices, the headline rate of inflation will probably continue rising in the coming months. Inflationary pressures could become even more pronounced once businesses such as those in the hospitality, travel and leisure sectors mark up their prices as soon as they are able to reopen their doors.
However, once the low base effect of 2020 wears off and the price increases from the oil rally and supply-side shocks fade, whether the upward pressure on prices persists will probably depend on the strength of demand. As things stand, consumption in the Eurozone is not expected to enjoy as strong a rebound as in the United States, where the virus relief packages approved far eclipse Europe’s in size (the EU hasn’t even started distributing last year’s €750 billion recovery fund).
A bumpy…
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