Euro area: taking stock of the inflation outlook

Eu ro area i nflation has lost s ignificant momentum over the last couple of months. It is difficult to find the one explanation for th is , al though demand weakness seems to be the dominating factor for now. The re-newed weakening of growth in the euro area on the back of the latest containment measures will consequently exert further disinflationary pressure in the short-term . Complicating the picture further, w e also f ind some evidence that non-cyclical factors have also co ntribut ed to the decline in core inflation. This may reflect more structural changes in the economy in response to the pandemic. While it is too early to quantify this effect with any confidence, we expect core inflation to only gradually rise during 2021 as the recovery resumes, but still to r emain below 1% until the end of 2022 . This very benign inflation outlook will allow the ECB to continue its very accommodative policy stance for the foreseeable future and to expand its purchase s as needed to provide a backstop for euro area governments.