In our briefing note on inflation we explore the three possible inflationary scenarios, break down the implications of these scenarios on the European banking system, and recommend actions for European banks and policymakers.

In the first quarter of 2022, economies across Europe recorded the highest levels of inflation
in a decade, and economists started acknowledging that inflationary pressure might not be temporary.

Inflation was widely expected to be a temporary consequence of extraordinary fiscal stimulus
and pandemic-induced supply chain disruptions. Economists are now acknowledging that
inflation is evolving from being transient and mostly technical, to being driven by persistent
demand-side and supply-side factors as well by structural changes in the way value is allocated within the economy. The recent rise in energy prices, exacerbated by the war in Ukraine, is the latest and likely the biggest inflation driver in the short term. In the medium to long term, structural factors, such as the shift to greener (and more expensive) energy, and the investment backlog, as well as demographic changes in Europe and key supply markets, are likely to stoke inflationary pressure.

Steering through this time of high inflation, whilst supporting the real economy in this
period of uncertainty and efficiently facilitating the reallocation of resources, will be the
measure of success for the banking sector. The central role of banks as an enabler economic
growth role will be emphasized yet again.

By supporting the recovery from the pandemic and helping to tackle the biggest issue facing Europe’s economy today, the sector can gain a stronger sense of purpose and ensure its ongoing relevance.