Weekly Update - Could inflation be more than transitory? The risk is low in Europe and a bit higher in the United States

The economic recovery in Europe and the United States has prompted a rise in inflation: 3% in the eurozone, 3.2% in the
United Kingdom and 5.3% in the United States in August. These levels are far above the targets set by central banks and
have not been seen for several years, giving rise to fears of lasting pressure on consumer prices.

The central banks call the rise in inflation transitory.
The recent rise in consumer prices is mainly due to a surge in energy prices and the recovery of consumer purchasing, whereas certain sectors remain disrupted by the effects of the pandemic.
These factors will quickly recede in the next few months as the health situation and economic activity go back to normal,
and will push inflation down to more moderate levels.

What are the risks of this rise in inflation taking hold?
- In the short term, developments in labour markets will be key, especially in the United States. Indeed, the increase in inflation could become a lasting trend if accompanied by wage pressures. Labour market disruptions are currently limited to certain sectors, and solid global employment levels do not point to a price-wage loop that will allow inflation to take hold. This is especially true in Europe. In the United States, the labour market is normalising and does not seem likely to exert lasting pressure on wages. However, the new fiscal package under discussion in Congress could continue to drive strong demand and consolidate price pressure.
- In the longer term, the basic components helping to contain inflation remain in place. The declining power of trade unions, robotisation and globalisation will continue to limit price increases. Although the health crisis once again raises questions around globalisation, in particular regarding the relocation of production chains to countries with higher labour costs, very few evidences have emerged to date and their effect on prices will take time.

Bottom line.
Inflation should return to more moderate levels with the normalisation of economic activity, as anticipated by central
banks. Nevertheless, if new pressures are emerging on the US labour market, it could signal expectations of a faster
tightening of monetary policy.

Read full article