Citi Sees Higher In Europe

Citi's take on why European inflation will head higher:

• "Housing costs into HICP — The Eurozone is finally moving towards accounting for housing costs in targeted inflation, fixing a long-standing anomaly, albeit officially not before 2026. The OOH basis historically has averaged just 7bp, based on our calculations, but at present it is worth 30bp, and possibly higher in quarters ahead."
• "Inflation expectations — Households' inflation expectations have remained relatively unaffected by the pandemic, both in the UK and the Eurozone. However, realized inflation rising to or above 3% by year-end could push them higher, eventually translating into higher wage growth than we currently envisage. "
• "Post-Covid price normalisation — Prices most affected by the pandemic are rebounding in the US and in the UK, but quite surprisingly to us, not in the Euro area. This may be just a delay or it may reflect relatively more slack. Prices will eventually normalize in the Eurozone too, but the Delta variant increases the chances of this process being delayed until 2022."