Inflationary pressures: elevated near-term but will they prove more persistent?

Inflation spikes have been observed in the global economy in 1H2021 in the aftermath of the Covid-19 pandemic and related support measures. These are mostly caused by fiscal and monetary laxity, supply chain disturbances, pent-up demand, base effects; each factor has a different time horizon. While inflation is a global concern, inflationary risks are far greater in the US than in the Eurozone. The baseline scenario is that inflation spikes are transitory; yet, they may last longer than earlier expected, with a risk to be embedded into inflation expectations. Advanced economies are still far from unwinding Central Banks' crisis-fighting measures; central bankers are committed to tolerating higher inflation until they are convinced economic recovery is sustained. The key to a sustained rise in inflation pressures is labor market developments, any labor shortages and/or wages increases in particular. The eventual rise of interest rates, while still a distant prospect, raises debt serviceability issues; in this respect, indebted EA countries should make the most of the current low interest rate environment (issue/extend long maturities, fix rates).