Price increases and fear of inflation are back to haunt the financial markets after years of inflation remaining stubbornly low despite extraordinary and unprecedented efforts by the world’s central banks to revive the beast.

“Inflation fears have returned to the markets in recent months, most notably in the US, and subsequently in Europe,” says chief analyst Jakob Ekholdt Christensen, who – along with his colleagues in Danske Bank research – sees the inflation question as one of the most pressing issues for the financial markets right now.

Few signs of enduring inflation
His analysis may calm anxious Danish consumers who fear that rising inflation may not only make a trip to the shops more costly but also hollow out their savings or lead to higher mortgage rates.

“We have lifted our core inflation forecast for 2022 slightly but see little evidence that euro area core inflation is about to return to pre-Global Financial Crisis levels on a sustained basis. The labour market holds the key to more a more sustained rise in inflation pressures and we see few signs of widespread labour shortages emerging in the euro area, as more workers will re-join the labour market as furlough schemes expire,” says Jakob Ekholdt Christensen. 

Much uncertainty 
Nevertheless, he acknowledges that much uncertainty remains.

“The drivers of the low inflation conundrum in Europe are imperfectly understood by academics and central bankers alike, and we do not pretend to have the ultimate answer to the euro area inflation puzzle, but we expect the current upward inflationary pressure to be temporary,” says Jakob Ekholdt Christensen.