Euro area: should we start worrying about inflation?

Ou r answer is no. While the sharp increase in inflation in January sparked concerns that the inflation outlook might be less benign than generally assumed , w e envisage a moderate increase of inflation to 1.4% this year, followed by a decline back to 0.9% in 2022 . T emporary factors can explain part of the increase in January. The underlying inflationary pressure is clearly more muted than what the headline figures would suggest. Moreover, even very strong growth in the coming quarters , given the low base of economic activity, w ill not necessarily lead to a significant rise in inflation. It is, of course, possible that inflation become s (a lot) more sensitive to growth in the coming years , implying a strong increase in prices once the recovery resumes . In order to assess the potential upside risk s stemming from such a structural change , we simulate inflation over the next two years , assuming that inflation is as sensitive to growth as it was before the financial crisis. E ven in such a scenario, however, core inflation would increase only to 1.5% by the end of 2022. In sum, it remains unlikely that inflation will converge quickly towards the ECB’s inflation target. This, in turn, means that the ECB will keep its very accommodative policy stance over the forecast horizon.