Twin Inflation Drivers Pose Challenges for ECB | Lord Abbett
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Economic Insights

A two-front inflation threat from energy and durable goods prices may signal a more persistent problem for central bankers

Read time: 2 minutes

Detailed data released on November 17 by Eurostat underscore the strong impact of energy and supply chains on European inflation, a theme we have explored in recent weeks as Europe experiences a natural gas shock and supply chains work through tremendous demand for goods in the post-COVID environment. These developments could prove quite vexing for the European Central Bank (ECB) as it tries to steer policy, especially as the continent enters the Winter months.

In looking at inflation inputs (Figure 1), energy contributed almost half of the 4.1% year-over-year inflation in October. Recent regulatory delays in a natural gas pipeline have triggered further increases in natural gas prices, likely exacerbating the impact of energy inflation on overall inflation in the Eurozone going forward.

 

Figure 1. Energy Prices Pace Euro Area Inflation
Contribution to Eurozone inflation by category, January 2019–October 2021

Source: Eurostat. Data as of October 1, 2021.

 

Secondly, durable goods inflation shows remarkable strength. For many years, durable goods in the Eurozone showed periods of deflation and represented a consistent drag on inflation developments. In the latest data, durable goods inflation is at an all-time high that is considerably elevated compared to past history.

 

Figure 2. Euro Area Durable Goods Prices Have Shot Higher
Euro area HICP inflation for durable goods (monthly), December 2001–October 2021

Source: Eurostat. Data as of October 1, 2021. Harmonised indices of consumer prices (HICPs) are comparable measures of changes in consumer prices. They are compiled on the basis of harmonised rules and standards, in particular regarding the coverage of goods and services and the treatment of price observations.

 

The November 17 Eurostat data underscore the challenges posed by rising energy prices and supply-chain strains that boost the cost of durable goods. These developments likely will present pronounced policy headwinds for the ECB and other European central banks in the months ahead.

 

 

 

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