Inflation in Europe sees short-term rise; Cyprus sees low inflation ahead for medium-term

Inflation returned to the euro area in January at 0.9 per cent due to a number of temporary factors, although in Cyprus it remained at a low -0.8 per cent.

Cyprus inflation is forecast to remain below one per cent through the end of 2021, according to Focus Economics. It has been at negative levels since July.

In Europe, consumer prices rose  more than economists expected, for the first gain in six months. A measure that excludes volatile items such as food and energy surged to 1.4 per cent, the highest in more than five years.

Much of the price pressure in Europe comes from supply chain bottlenecks.  Container traffic is blocked and rates are skyrocketing. Some businesses were being charged $12,000 per container, up from about $2,000 in October, according to shipping researcher Drewry.

EU businesses, stuck in lockdowns, are raising prices to get the most out of their constrained operations.

But economists say that these are temporary factors. It is unlikely that the European Central Bank will consider raising rates.

“Temporary factors are pushing up inflation at the moment,” and “that’s exactly why the ECB shouldn’t be alarmed,” said Bert Colijn, senior euro-zone economist at ING. “With wage growth weakening and unemployment expected to increase in 2021, sustainable moves toward target remain a while away,” he told Bloomberg.

Economists predict that EU economic activity will slow in the first half of this year, and this risks pushing back recovery. Some economists even forecast prolonged stagnation, rather like the stagflation that has dogged the Japanese economy for many years.

The International Monetary Fund forecasts that the euro-zone economy will remain 6 per cent below its pre-pandemic levels by the end of this year. Investors expect euro-area inflation to remain at 1 per cent or below over the next five years.

The European Central Bank is ready to use all the tools necessary to stimulate inflation, and is keeping a close eye on the euro’s appreciation, Governing Council member Olli Rehn said.

“We are certainly ready to use and adjust all our instruments as appropriate,” the Finnish governor said at the end of January in an interview with Bloomberg Television.“We are closely monitoring developments in the exchange rate, especially regarding the inflation outlook.”