Eurozone: The inflation conundrum - ING

"The inflation story is puzzling us. Pipeline inflation is definitely rising, while the labour market is tightening," ING economists wrote in a recently published report.

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But we still have some doubts about the speed of transmission into higher inflation rates. In the PMI Manufacturing Survey businesses reported elevated rates of inflation in both output prices and input costs as supply chain pressures increase, with average vendor lead times lengthening to one of the greatest extents on record.

The unemployment rate, standing at 8.7%, has now been declining continuously since May 2013 to reach the lowest level since January 2009. Looking at the hiring intentions published in the European Commission’s Economic Sentiment Survey, this decline is bound to continue. Indeed, in December employment plans reached the highest level in 30 years in industry, while they also improved in construction (to a 10-year high) and in services. The unemployment rate is, therefore, most likely to fall below 8% by the end of this year.