Inflation & Term premium: Post COVID analysis
It is common knowledge that the financial market experienced some severe complications over the last decades. From the Global Financial Crisis (GFC) of 2008 to the Greek government-debt crisis and the recent pandemic shock, measures had to be taken to reduce the effects, like the historically noticeable low interest rates, even at the long end of the yield curve. Understanding the source and the economic effects of the government bond yields decline was a subject brought to the limelight by many academics. In fact, these events almost jeopardized the stability of the euro, thus making the challenge of strengthening the EU even greater. Investors grew in fear of what could be upcoming next, which made them seek more safety.
As a result, long term yields drowned in low record levels. Among the measures adopted to stabilize the financial market and stimulate economic growth, The ECB set up an unconventional monetary policy through negative rates and quantitative easing.
Recently, The ECB decided to also modify some key parameters of the third series of targeted longer-term refinancing operations (TLTRO III).
A significant jump in 2021
The International Monetary Fund (IMF) define the inflation as the rate of increase in prices over a given period of time. Inflation is typically a broad
measure, such as the overall increase in prices or the increase in the cost of living in a country.
The purpose of all monetary policies is genuinely to support the continued access of firms and households to bank credit, despite the disruptions and
temporary funding shortages induced by the coronavirus epidemic.
Moreover, the decline in hourly labor productivity in companies, the sharp rise in unit production costs due to the epidemic could lead to some serious
changes in the inflation. In fact, some sectors are experiencing a decline in labor productivity, which alerts of an inflation of 3 to 4% per year if the new
health standards are maintained.
It is therefore very likely that in 2021, or at least in the first half of 2021, inflation in the eurozone will rise above the ECB’s target inflation of 2%, the statistics of Eurostat, the statistical office of the European Union are confirming that :
The euro area annual inflation rate was 1.3% in March 2021, up from 0.9% in February. A year earlier, the rate was 0.7%. European Union annual inflation was 1.7% in March 2021, up from 1.3% in February. A year earlier, the rate was 1.2%. The lowest annual rates were registered in Greece (-2.0%), Portugal,
Malta, Ireland and Slovenia (all 0.1%). The highest annual rates were recorded in Poland (4.4%),Hungary (3.9%), Romania and Luxembourg (both 2.5%).
Compared with February, annual inflation fell in three MemberStates, remained stable in three and rose in twenty-one.
