The latest Eurostat figures confirm that inflation in the euro zone reached a three-year high of 2.2 per cent in June.
This is above the European Central Bank target of 2 per cent, though it is largely driven by a sharp rise in energy prices. Excluding these, core inflation rose by just 0.9 per cent. For now, it appears, there is no evidence of broad-based inflationary pressures and no reason for the ECB to change its policy approach, even if a minority on its governing council want to start reining in its bond-buying programme.
The debate is further on in the US, where there is argument among economists and policymakers about whether the US Federal Reserve needs to start pulling back its bond-buying programme, as a step on the road back to normality.
It is possible it could start doing so later this year, and some analysts believe that inflation and employment data could support an increase in Fed interest rates as early as next year. In this context there is fierce debate among economists about whether President Joe Biden’s stimulus plans could just add fuel to the inflationary fire.
Where the US goes, Europe may not necessarily follow. Very low inflation has appeared to be ingrained in the euro zone economy in recent years.The majority view on the ECB council is to press ahead with its stimulus programme, with bond-buying set to continue at its current levels until next March at least.
But what we do not know yet is what the next few years might look like. The exit from the pandemic brings a new unpredictability to policy. As well as energy prices, we are also seeing prices rise in other areas, such as building materials or those hit by supply chain problems.
The dynamic has been for central banks to support exchequers through the crisis, with monetary and fiscal policy working together. Whether we ever go back to the old vision of the central bank’s role being to take away the punch bowl just as the party gets going is a big question.
The gradual withdrawal of the extraordinary supports seen during the crisis could yet be rocky.