Key Takeaways

• Inflation is being driven by supply-demand imbalances. Currently, most inflation in Europe is tied to the supply side of the economy: energy prices, reopening effects and supply chain bottlenecks throughout Europe and the UK account for 65% to 75% of headline inflation. In Europe and the UK, food prices account for 18% and 10% of headline inflation, respectively. 
• Unlike the U.S., continental Europe’s demand recovery has been anemic, pointing to fundamentally different economic contexts that are driving the inflation backdrop. In the UK, there is more evidence of a demand-side recovery, particularly in non-durable and semi-durable goods. 
• The Russia-Ukraine conflict has meaningfully impacted commodities-related inflation. 
• Central banks are responding to the current inflation environment, although the European Central Bank (ECB) has generally been the most reticent to pivot to a more hawkish stance.