The recovery in the Old Continent seems to be going from strength to strength. Business activity in the Eurozone grew last month at its highest rate since June 2006 , that is, in 15 years, according to the PMI index compiled by IHS Markit. Of course, Chris Williamson, chief economist of the consultancy, warns that “inflationary pressures have also increased.”
” Companies in the service sector [in the euro zone] are raising their prices at the most pronounced rate in more than 20 years , as costs skyrocket,” stressed this expert.
In Spain , companies in the service sector (the one that has the most weight in gross domestic product or GDP) raised their prices at the strongest rate since the beginning of 2000, according to IHS Markit. This is a “reflection of the strengthening of the economic environment”, according to Paul Smith, economic director of the consultancy.
Thus, in the current scenario, the increase in costs faced by companies translates into higher prices for their customers. Something that “is likely to translate into a rebound in underlying price pressures across the euro area in the coming months, ” said Mateusz Urban, an economist at Oxford Economics.
What is expected of inflation?
Inflation in the euro area ‘eased’ last month. In the interannual rate (that is, compared to the same month of the previous year), it went from 2% in May to 1.9% in June . A slight drop that, however, will in all probability be prior to a sharp increase in prices.
Many analysts project the consumer price index (CPI) above 3% year-on-year in some months of the remainder of 2021. This would imply being one percentage point above the target set by the European Central Bank (ECB).
David A. Meier, economist at Julius Baer, predicted last Thursday that inflation in the Eurozone will fall again slightly this July “before picking up again and reaching a maximum in the fourth quarter of 2021 around 2.5 % YoY “.
The Swiss private bank expert pointed out two reasons why the evolution of prices will be the same in the shortest term. First, the delay in summer sales from last year due to the pandemic will lead to lower year-on-year inflation in July, when summer sales start already this year.
Then, the cancellation of the temporary one-year German VAT rebate in July last year will cause inflation to exceed 2% in August, after being offset by the effect of sales in July.
However, the ECB, in its latest ‘macro’ projections, anticipates that the CPI in the euro zone will end the year at 1.9% (that is, even below its own target). Next year it will drop four tenths, to 1.5%, and in 2023 a little more, to 1.4%, according to the monetary body.