FRANÇOIS DOUX
In the Chart of the Month we will be looking at eurozone inflation. Will it finally bounce back?
William De Vijlder. Hello.
WILLIAM DE VIJLDER
Hello François.
FRANÇOIS DOUX
We know that in Frankfurt, the European Central Bank is paying a lot of attention to this question.
WILLIAM DE VIJLDER
A key question!
FRANÇOIS DOUX
There are already several fairly clear, fairly legible factors that suggest a possible rebound in inflation. First, the labour market and unemployment. Will these drive an uptick in inflation?
WILLIAM DE VIJLDER
Not at all. This will be the last factor to push in this direction. In the short term, if anything, we expect unemployment to rise, so no acceleration in wage growth, and no upward pressure on inflation.
FRANÇOIS DOUX
The second fairly clear factor: energy prices, particularly the oil price. This has started to rise again.
WILLIAM DE VIJLDER
Yes, on a year-on-year basis we have indeed seen a contribution to higher inflation. It only accounts for a certain percentage, but is nevertheless a factor.
FRANÇOIS DOUX
And we have clearly a third factor, that affects only Germany. That is the ending of reduced VAT on 31 December 2020. This is another factor we would expect to see pushing up inflation in Germany.
WILLIAM DE VIJLDER
Yes, indeed. This is likely to be visible as soon as we see figures for January. But this is a German issue and does not affect the other nations.
FRANÇOIS DOUX
Now let’s look at what companies are doing to anticipate this return of inflation. In this chart, William De Vijlder, you use the blue line to show input prices, that is to say the prices companies pay for the commodities and the semi-manufactured products they buy for use in their production. Then, we have production prices, “factory gate” prices, if I can simplify somewhat. And the red line shows supplier delivery leadtimes. Obviously these peaked in 2020. Deliveries took longer because of the lockdowns in the eurozone. What is your analysis for 2021 now?
WILLIAM DE VIJLDER
These survey figures are very important. They show how companies are foreseeing the inflation situation. The sharp rises that we saw in delivery times and input prices suggest a coming acceleration in eurozone inflation.
FRANÇOIS DOUX
So, to go a little further, you have combined both input prices and delivery times. This is what we can see with this chart. The manufacturing sector Purchasing Managers Index, or PMI, the component of pressure on prices, and the blue line, of course, is underlying inflation, excluding food and energy. How do you interpret this chart? Will inflation rise?
WILLIAM DE VIJLDER
This is the conclusion we reach, but I would take a more nuanced approach. In effect, there is a 12-month lag between pressure on prices, the red line on the chart, and underlying inflation, the blue line. This lag says: “recently you have seen this pressure on prices being reflected by company responses to surveys. In 12 months, or so, we are likely to also see an acceleration in eurozone inflation.”
FRANÇOIS DOUX
So we also need to remain vigilant when it comes to supply side factors, such as those we discussed at the start of the interview.
WILLIAM DE VIJLDER
Absolutely. In particular we need to keep an eye on trends in unemployment and in demand. This will help understand whether this rise in inflation will be long-lasting or not. This is something to keep very much in mind, as it will affect the behaviour of financial markets through expectations about the statements coming out of the European Central Bank. Another important point, meanwhile, that I must stress, is that we are seeing a similar pattern when we look at the US economy.
FRANÇOIS DOUX
So, we will need to watch developments on both sides of the Atlantic. Thank you, William de Vijlder.
