EU raises inflation forecasts on supply disruptions, energy crisis

• The European Commission on Thursday raised its inflation expectations for this year but is still expecting prices to move below the European Central Bank’s target of 2% in 2023. The Brussels-based institution said inflation will hit 3.5% this year from a November forecast of 2.2%. 
• The debate over inflation in the 19-member bloc is fierce. On the one hand, some argue that current inflationary pressures will ease and a degree of loose monetary policy is needed. Others counter that the ECB needs to tighten monetary policy after consecutive historic monthly highs in inflation. 
• The commission noted that after reaching a record rate of 4.6% in the fourth quarter of last year, inflation in the euro area is projected to peak at 4.8% in the first quarter of 2022 and remain above 3% until the third quarter of the year. 
• 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 below the European Central Bank’s 2% target throughout 2023. As such, the commission estimated that annual inflation in the euro area will rise from 2.6% in 2021 to 3.5% in 2022, before then falling to 1.7% in 2023. 
• These numbers, however, point to an upward revision in the ECB’s inflation forecasts at its next meeting in March. Market participants will be closely following 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 massive impact on the recovery of the eurozone economies, some of which were particularly hit by the pandemic.

(Source: CNBC News)