- Inflation has dominated the week again, both in terms of releases and our thematic focus. The flash EA HICP rate for July exceeded expectations by 0.2pp as it increased to 2.2% y-o-y. Germany and France delivered most of the upside, with the latter possibly backloading more sales again like last year. We still see this as a temporary overshoot, with EA inflation set to fall back below target in 2022. The dovish ECB currently seems to agree. For it to become more of a problem, signs of persistence need to rise further, like underlying inflation measures. A shift in inflation expectations that might permit second-round effects would be the worst outcome. Anchors are being tested but appear to be holding (see Inflation: Will your anchor hold?).
- The numerous final PMI releases roll out next week, although we still struggle to get excited about them. Revisions on the flash estimates are small relative to the noise in the data, especially since Covid broke related growth tracking models. Our focus is instead on the policy side as the Bank of England MPC unveils its latest forecasts alongside the policy vote. Haldane has left the MPC without replacement yet, taking his dissenting voice with him, but Saunders seems likely to pick up that torch. Hawkish updates are likely to look consistent with policy tightening in 2022, but we still expect that to ultimately be postponed to 2023 by disappointing demand data.
- Surveys and other indicators now suggest that pricing pressures are rising. The coming months will be a major test for inflation targeting regimes aiming to keep expectations anchored and separated from realised inflation rates.
- At least for now, inflation anchors appear to be holding, so the market may well be surprised at how quickly the base effects which drove up headline inflation and wages in 2021 go into reverse.
Gertjan Vlieghe considers what we have learned in the past five years about some of the structural drivers of low interest rates, such as demographics, debt and the distribution of income.
He also discusses how to set monetary policy in a constrained environment, given the limited monetary policy space created by these structural factors.
Then he considers how these constraints could be lifted to ensure the effectiveness of future monetary policy.