Highlights:

• The flash estimate for February euro area inflation of 0.9% yoy is unchanged with respect to January. We see headline inflation trending up further even exceeding the 2% threshold in April/May before abating again, mostly due to temporary higher energy price inflation.
• Among EMU economies German inflation (February: 1.6% yoy) will stay above average. Special factors like the end of the temporary VAT cut, the introduction of a carbon tax and changes in the HICP basket weights could temporarily lift it above 3% yoy, leading to bouts of volatility.
• That said, underlying inflation will stay muted in the presence of a still sizeable negative output gap. We expect annual inflation to average 1.5% in 2021 but to moderate to 1.2% in 2022.
• At its forthcoming meeting on March 11 the Governing Council will make clear that it looks through the short-term spike and keeps its focus on still far too low underlying inflation implying that the current highly accommodative policy stance will be maintained.

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