In this context, to what extent should we worry about the risk of stagflation? We are not there yet, if we consider that stagflation is a multiannual phenomenon that combines high unemployment with strong inflation (see chart 2). Although inflation is surging (7.5% y/y in March according to the Eurostat Flash estimate), the unemployment rate continues to fall (6.8% of the labour force in February). We also found it reassuring that business leaders’ assessments of job prospects did not deteriorate much in March. In our baseline scenario, the war’s impact on growth is offset by fiscal support measures, the mobilisation of excess savings inherited from the Covid-19 crisis, and investment needs (both pre-existing ones and new ones revealed by the conflict). We expect the shock to prove temporary (2023 growth is forecast at 2.7%), which should limit the upturn in the unemployment rate. In other words, higher inflation does not degenerate into stagflation. Yet there is a real risk given the downside risks to growth (it is worth monitoring the deterioration in households’ assessments of unemployment prospects) and the upside risks to inflation. Although the latter remains mainly energy-related, the shock is spreading (core inflation was 3% y/y in March), and the level and timing of the inflation peak is still highly uncertain. Although there are still no signs of a price-wage loop, the environment is clearly more inflationary, which explains why the ECB tightened its tone at the 10 March meeting. Yet it was also based on growth forecasts that were probably overly optimistic (3.7% in 2022 and 2.8% in 2023 according to the ECB’s central scenario). Although, on this basis, the ECB is preparing to halt net securities purchases as part of its Asset Purchasing Programme (APP) as of Q3 2022, this decision continues to be data-dependent. And although the halting of net securities purchases opens the door to an increase in the key deposit rate before the end of the year, the timing is still uncertain.
