When the pick-up in inflation during a growth upswing is driven by the demand side, inflation is considered to be good. However, inflation can also be bad. In that case, higher prices do not follow from e.g. higher wages due to a tight labour market. Bad inflation rather reflects supply-side shocks. This is, to some degree, the situation that is unfolding in the Eurozone and other economies due to the recent huge increase of oil and gas prices. Bad inflation weighs on households’ real disposable income and hence spending. The impact is expected to be larger for households at the lower end of the income distribution, considering that a bigger portion of their expenditures goes to fuel and in particular heating, and that they also have a lower savings rate.
Our Pulse chart shows that the economic situation in Q3, designated by the blue area, was almost unchanged from that in the previous quarter, represented by the area delimited by the dashed lines. Recent business cycle indicators even suggest that the recovery is losing steam. The ifo business indicator has been declining since July. In particular, the manufacturing sector is reporting a worsening of business conditions as both activity and expectations are on a declining trend.
For the first time in several months, the INSEE and Markit business climate surveys did not move in the same direction in September. The INSEE composite index picked up slightly (up 1 point to 111), while the composite PMI continued to erode (down 1 point to 55). The activity component of the manufacturing PMI declined more sharply (down 3 points to 51.3) than for the services PMI.
The Covid-19 pandemic continued to ease for the fifth consecutive week, with new cases down by 10.3% between 23 and 29 September, relative to the previous week (chart 1). This represents the biggest fall in case numbers since the end of August 2021. As far as visits to retail and recreation facilities are concerned, we have recently seen weaker numbers in some euro area countries.
