• Before we preview today’s ECB meeting, we want to briefly discuss inflation. As we know all too well, inflation readings are high. Inflation readings as in year-on-year percentage increase in the consumer price index. The consumer price index called the Harmonized Index of Consumer Prices (HICP), which is compiled by Eurostat. In March, consumer prices in the Euro Area as measured by the HICP rose by 7.5 percent compared to the same month a year ago. Such numbers are guaranteed to make headlines. Dramatic headlines, in the negative sense of the word.
  • When we were in camp transitory with regards to inflation – clearly a mistake – we analyzed not the annual percentage change inflation, but the percentage change in consumer prices since December 2019, the eve of the pandemic. After all, during much of 2020 the Eurozone was actually in deflation because demand had collapsed more than supply. Thus, at some point, when the economic recovery would be underway, inflation was bound to become artificially high because of a thing called base effects. On the eve on the war – so, February 2022 – consumer prices in the big four economies of the Eurozone had increased by 6.5 percent over a 26-month period. Bad, but certainly not terrible when one takes into account the unprecedented economic dislocations. Then came the war. And the rest, as they say, is history.

 

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