Quantifying the upside risks to euro area inflation

Eu ro area i nflation has increased significantly since the end of last year , from below zero to around 2% by the middle of the year . Th e rise in headline inflation is mostly driven by energy prices and the underlying inflationary pressure remains so far benign. This, however, need not stay that way. Price s on the producer level are rising strongly and it is likely that services prices will increase more strongly going forward as companies are trying to make up for some of the revenues lost during the lockdown. T o better assess the risks surrounding the inflation outlook , we deploy a so-called quantile regression model that allows us to quantify specifically the upside risks to euro area core inflation. We find that the risks of a surge in core inflation remain limited. This is true even if we simulate a significant “overheating” of the economy. In both cases, the probability that core inflation ends the year 2022 above 2% is seen as below 10%.