Temporary effects are distorting inflation data for the time being. Unemployment and corporate bankruptcies to continue rising long into the ongoing economic recovery. Pace of the economic recovery highly correlated with extent of containment measures implemented.
Chart of the month
The July inflation reports took economists by surprise and generally led to upward revisions of our 2020 inflation forecasts. Two major, albeit temporary effects were at work. In the US and France, the demand recovery led to a rebound of prices in battered areas such as clothing. Also, many services were unavailable during the lockdown and prices had to be imputed. In the UK, renewed data collection in these services, which tend to have an above-average inflation rate, put an upward bias to headline inflation. The outlier in July was Germany, where the pass-through from the temporary VAT cut on consumer prices was much larger than anticipated, which led to opposite inflation dynamics than in neighbouring France.