Economics in a picture
A large share of consumer prices in the euro area have shown higher growth than prior to the pandemic outbreak
Euro area inflation has been rising since early 2021, reaching its highest value since the beginning of the monetary union. Most of that increase is explained by the evolution of energy prices. However, the rise in inflation has not been confined to energy goods. In early 2022, around 80% of the products that constitute the HICP basket showed a price change above the figure observed on average in 2018-2019. Around 60% of the products showed a price change above the ECB’s price stability objective (2%). The generalised price acceleration will have in part reflected the rise in the international prices of energy commodities. Such increase will have impacted not only the prices of energy goods in the euro area, but also the price of other goods and services which production relies on its usage. Disruptions in the global supply of several non-energy goods will have also contributed to the increase in inflation. The military conflict in Ukraine has exacerbated these trends.
Uncertainty about future inflation behaviour in the euro area is high. Economic theory stresses the importance of closely monitoring inflation expectations and wage behaviour. These indicators may provide important guidance on the persistence of the inflation increase and signal risks to price stability over the medium term. So far, wage growth has been contained and indicators of longer-term inflation expectations are at levels that are broadly in line with the ECB’s price stability objective.
For more details see the Special issue “Why is inflation higher in the euro area?”, published in the Economic Bulletin of Banco de Portugal, March 2022.
Prepared by Alexandre Carvalho, Bruno Freitas and Joana Garcia. The analyses, opinions and findings expressed above represent the views of the authors and not necessarily those of Banco de Portugal or the Eurosystem.
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