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Eurozone: Inflation at 10-year high, ECB testing

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After talking all the time about the Fed, let’s take a look at the other side of the water. August inflation, announced today, has risen to a 10-year high of 3%, pushing a threshold that tests the ECB’s motto to wait before reducing PEPP. On the core inflation side, which excludes volatile items such as food and energy, we are at 1.6%. Although policy makers believe in the phenomenon that inflation is temporary, what really concerns us is the cost pressure created by the global supply squeeze rather than the current levels of inflation. These are the facts that directly affect inflation in the economies of developed countries, and in fact, they are an issue worth considering for the ECB, which is expected to taper later and more slowly than the Fed.

 

The main factor in worrying about the future levels of inflation; The global inflation trend and tightness in supply cause prices to tend to increase in the upcoming period. In fact, this is an issue we are used to in countries with unstable inflation. However, the dynamics of the pandemic disrupted the global economic balances and caused inflation uncertainty in countries such as the US and the Euro Zone. Here’s the thing; Concern about sticking to inflation. While core inflation may not seem that alarming, the main concern is not the volatile items, but the additional price effects that traditional items can create. Because; If the Bank does not want to reduce their asset purchases early, the concern that the Delta variant will cause an economic slowdown may be the reason for the insistence of the Lagarde administration. However, it is unclear whether the economic slowdown will now be a slowdown in acceleration, or a slowdown that weighs down the downside risks that are worrisome.

 

Therefore, the governance and communication method of the ECB will also gain importance. It will be necessary to pay attention to the US – German yield spreads. Fed’s tandance says this spread can be widened in favor of the US. However, it should be noted again; Although the global economic recovery provides comfort as it sets the standard, the increase in coronavirus infections and the slowdown in global vaccination rates (thanks to both the organic slowdown and anti-vaccine opponents, also the effect on new variants cannot be predicted) may cloud the economic outlook. The future of the Covid epidemic remains uncertain, and the global economic recovery is not homogeneous. A homogeneous recovery cannot be mentioned in terms of the entire Euro Zone, we are talking about 19 chapters, not a single chapter. The Fed is more relaxed about it.

 

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The ECB will hold its policy meeting on September 9, and since this meeting will also include an economic projection update, it is not important in terms of action, but in terms of guidance and the signal to be spread by data forecasts. The ECB will refrain from taking dramatic action so early. We will also look at how much the Fed’s tandance will widen the gap, because the Fed conceptually differentiated the tapering phenomenon from the interest rate hike (again, this is the theoretical behavior anyway), providing relief in terms of movement. Therefore, it is normal that one of the meetings that will take place in September before the end of the year will also include the first QE reduction. The Fed’s role requires it to be trendsetter or trendkiller.

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