Eurozone | Transitory inflation surge unlikely to boost bond yields

The coronavirus crisis pushed eurozone inflation to a four-year low of 0.3% in 2020. We expect it to rise to 1.2% this year, but primarily due to the end of a host of transitory factors rather than a pick-up in underlying price pressures. And, considering the ECB’s QE-backed pledge to engineer a sustained recovery in inflation, we see little scope for bond yields to move much higher.

What you will learn:

• Rising consumer energy prices will do the heavy lifting, adding around 1ppt to headline inflation this year compared to 2020.
• Core inflation may see a small lift later in 2021 as sectors hit hardest by the crisis begin to recover.
• Financial markets may try to push bond yields higher this year, especially if they interpret transitory inflation rises as a sustained surge.