ECB Economic Bulletin: Inflation lasting longer than originally expected

In the latest economic bulletin, the European Central Bank (ECB) noted that inflation is lasting longer than originally expected but is set to decline next year.

Key takeaways

“At the global level, economic activity continued to expand, albeit at a measurably moderating pace, amid a combination of factors, most prominently persistent supply bottlenecks.”

“Price pressures remain elevated on account of increasing food and energy inflation, reflecting the rebound from the low-price levels recorded immediately after the onset of the coronavirus (COVID-19) pandemic. Most of the price pressures are judged to be of a temporary nature.”

“The upswing in inflation largely reflects a combination of three factors. First, energy prices – especially for oil, gas and electricity – have risen sharply. Second, prices are also going up because recovering demand related to the reopening of the economy is outpacing supply. And finally, base effects related to the end of the VAT cut in Germany are still contributing to higher inflation.” 

Meanwhile, the ECB rate hike expectations are back on the table, with the Eurozone Money Markets now pricing in a 10 Bps hike by September 2022 vs. by December earlier this week, per the ECBWatch.

In contrast, US money markets now price a first Fed interest rate increase by July.

Market reaction

The euro is little impressed by the above headlines, as EUR/USD trades at fresh yearly lows of 1.1453, down 0.16% on the day.