The Eurozone Faces an Inflation Roller Coaster

Key Insights

• Unprecedented fiscal and monetary stimulus in Europe has prompted a debate over whether higher inflation is ahead.
• Low wages and spare labor capacity will likely mean that inflation will fall next year.
• Changes in wage and carbon policies may then push inflation higher again in 2023.

Rising inflation in the eurozone likely has longer to run, but we don’t believe it is permanent. Although the eurozone consumer price index (CPI) was expected to hit 1.6% in April—its highest level in two years—spare capacity in the labor market should contribute to its decline again in 2022 once the impact of one‑off factors diminishes.

Depending on the outcomes of European elections over the next 12 months, large rises in minimum wages, and the cost of brown energy, eurozone inflation could rise again significantly in 2023. Investors may wish to take this inflation roller coaster into account when planning their medium- to long-term bond strategies.

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