Headline inflation came in higher than our above-consensus forecast in August and, at 3.0%, reached its highest level for a decade. It is likely to rise a bit further in the coming months: producer price inflation has risen recently and the price components of surveys such as the PMIs show that price pressures are still strong. However, we think inflation will drop even further than the consensus and ECB expects over the next two years. This is largely because we expect wage inflation to remain low, given that there is more slack in the labour market than before the pandemic and that the Phillips curve is flat. Although there are some signs that the recovery is losing momentum, this is inevitable as activity gets close to its pre-pandemic level. Against this backdrop we think the ECB is likely to dial down its emergency asset purchases slightly on Thursday and end them completely next March, but continue with its standard asset purchase programme for several years and leave the deposit rate unchanged for the foreseeable future.
Become a client to read more
This is premium content that requires an active Capital Economics subscription to view.
Already have an account?
You may already have access to this premium content as part of a paid subscription.
Sign in to read the content in full or get details of how you can access it
Register for free
Sign up for a free account to:
- Unlock additional content
- Register for Capital Economics events
- Receive email updates and economist-curated newsletters
- Request a free trial of our services