EU raises inflation forecasts on supply disruptions energy crises

February 11, 2022: On Thursday, the European Commission raised its inflation expectations for this year but is still expecting prices to move under the European Central Bank’s target of 2% in 2023.

The Brussels-based institution said inflation would hit 3.5% this year from a November forecast of 2.2%.

The debate more than inflation in the 19-member bloc is fierce. On the one hand, few argue that current inflationary pressures will ease, and a loose monetary policy is needed. Different counter that the ECB needs to tighten monetary policy after consecutive historic monthly highs in inflation.

Bundesbank Governor Joachim Nagel became the second central banker in the previous few days to indicate that the ECB may increase rates later this year.

Therefore, the European Commission, the executive arm of the EU, said on Thursday that inflationary pressures are likely to come down next year.

“After reaching a record rate of 4.6% in the fourth quarter of the previous year, inflation in the euro area is projected to peak at 4.8% in the starting of the quarter of 2022 and remain over 3% until the third quarter of the year,” the commission said in a statement.

“As the pressures from supply constraints and high energy prices fade, inflation is expected to decline to 2.1% in the final quarter of the year, before moving less than the European Central Bank’s 2% target throughout 2023,” the institution added.

The commission estimating that annual inflation in the euro area will rise from 2.6% in 2021 to 3.5% in the year 2022, before then decreasing to 1.7% in 2023.

These numbers, although, point to an upward revision in the ECB’s inflation forecasts at its next meeting in March.

Market participants will closely follow the meeting to understand whether the ECB will cut its bond-buying program or adjust any other terms of its policy. Whatever the central bank decides to do could have a huge impact on the recovery of the eurozone economies, some of which were particularly hit by the pandemic.

Speaking to CNBC on Thursday, European Commissioner Paolo Gentiloni noted that institutions were currently considering whether inflation would be more persistent than previously estimated. He is “confident” in the decisions that the ECB will take.

However, he said a loose monetary policy is one of the critical factors supporting the eurozone recovery this year.

“We are still in an environment of negative rates and perfect financing conditions for our economy, and this is one of the fundamentals that can support a good level of growth for the next months,” he said.