A second reason to remain alert is that despite the recovery in growth and employment, the persisting output gap is still keeping inflation dynamics weak. The October inflation rate stood at 0.5%. While this marks the highest level recorded in almost two years, it remains far below the ECB’s objective.
And while we expect headline inflation to continue rising over the coming months, much of this increase will be driven by statistical factors related to the mechanical unwinding of the extreme oil price declines a year ago. We do not yet see a consistent strengthening of underlying price dynamics.