Eurozone: Why January’s inflation jump won’t scare the ECB

With January’s detailed inflation report showing that transitory factors caused
much of the month’s surprisingly large rise, a partial retracement is possible in February. In addition, we don’t find signs of a big jump in underlying inflation. And while we still expect inflation to recover strongly this year from 2020’s extreme lows, fuelling the reflation will mostly be base effects and higher energy prices. We continue to think the ECB will look through this.

What you will learn:

  • Over a third of the rise in headline inflation to 0.9% from -0.3% in December was due to a jump in goods prices and triggered by disrupted winter sales, not suddenly climbing demand or tight supply.
  • The doubling of services inflation to 1.4%, accounting for over a quarter of headline inflation’s rise, will likely last longer.
  • A cross-check with several measures of core inflation suggests that underlying inflation appears to be normalizing towards its subdued post-financial crisis normal after last year’s extremely low inflation.

Topics: monetary policy, Price Inflation

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