There was a heated debate in market circles last fall over whether rising inflation in the US and Europe to around 4% would be temporary or permanent. Based on our previous study of the structural drivers of inflation, we are somewhat of a “persistence” position. Long-term factors such as pressure on wages due to growing labor shortages, less reliance on China as a source of cheap labor-intensive goods, strong mobilization of governments with new post-pandemic spending, and the costs of transitioning to a green economy will come to an end. the “new” normal of low inflation and low interest rates. As for the short term, we are in the “temporary” camp. As soon as the supply-side crisis, largely related to the pandemic, subsides, the inflation index will again fall significantly during 2022.

Of course, we did not know what Russian President Vladimir Putin would do. On top of a strong post-pandemic recovery in the US and Europe, Russia began turning off taps last fall, reducing natural gas flows to Europe largely by not increasing storage at its facilities, Gazprom said. Rising prices for oil, gas and food products after Russia’s invasion of Ukraine dispelled all hopes for an early decline in inflation. In contrast, headline inflation in the eurozone jumped to 8.9% year-on-year in July, the highest level in more than 40 years. However, the recent correction in Brent oil prices from 110 euros in early July to 97 euros per barrel could reduce inflation by 0.4 percentage points within two months. Food price inflation either peaked in July or will soon, judging by lower grain prices.

However, the end of temporary German subsidies for gasoline and public transport tickets could add 0.3 percentage points to inflation in the euro area in September. And the reduction in Russian natural gas deliveries to 40% of capacity on June 14 and to just 20% on July 27 led to a sharp increase in wholesale gas prices from 90 euros per megawatt-hour in early June to about 200 euros today. As a result, we expect inflation to reach 10% in October and remain at that level until the end of 2022, and then decline significantly from early 2023.

* Economist at investment bank Berenberg Bank.