Since the end of last year, we have seen successive and significant downward revisions to the inflation outlook, bringing down the 2021 inflation projection from 1.8 percent to 1.5 percent. Although wage growth has picked up, firms are currently absorbing cost increases in lower profit margins (Chart 23).
Especially in the manufacturing sector, it is plausible that the reluctance to raise prices may in part be attributed to the weak level of external demand. Taking a longer-term perspective, the persistent current account surplus of the euro area in recent years may also have acted to dampen inflationary pressures, in view of the importance of domestic demand in price dynamics.