Inflation in the eurozone is rising, but systemic weaknesses must be considered.

In March, headline inflation in the Eurozone rose from 0.9 to 1.3%, owing primarily to rising energy prices. Despite dropping oil prices in the middle of the month, gasoline prices continued to rise during March, pushing energy inflation higher, although base effects from last year continue to inflate the figure for the time being. In March, energy inflation jumped from -1.7% to a whopping 4.3%, and it is expected to keep driving up the headline index in the months ahead.

Thanks to a much lower goods inflation reading, core inflation dropped from 1.1 to 0.9%. Expect this to be a one-time phenomenon, as goods inflation is projected to rise steadily in the coming months as input prices rise. Since supply chains have been disrupted and product prices have increased, goods producers have projected an increase in retail prices in the coming months. Still, with low incomes, diminishing fiscal stimulus, and slower growth rates than in the US, overheating in the eurozone isn’t a problem for the time being.

Consider how global inflation pressures could cause spillovers through higher commodity prices or minor second-round effects, resulting in inflation not dropping all the way to 1% again. However, in the first half of 2022, we expect inflation to fall back below 1.5%. This predicted inflation course for 2021 and 2022 would put the European Central Bank to the test in terms of communication. With the economy still contracting and lockdowns extending into 2Q, it may seem that the ECB is not yet behind the curve on inflation.