Euro area: Stagflation in the Sun

Key arguments

• Heatwaves are a persistent but ultimately temporary cost-push shock to euro area headline inflation, not a permanent inflation driver.
• Energy prices rise 0.81pp on impact and stay significant for two quarters, likely from air-conditioning-driven electricity demand.
• Food price pass-through is sharp but fades after the first quarter, so no permanent food inflation over the medium run.
• Aggregate GDP losses are not statistically significant because less-affected regions or internal transfers offset heat-affected areas.

Corresponding source evidence

1. These additional pressures on headline inflation (and its key components) will materialise by early next year, aperiod during which we already foresee higher energy prices due to the Middle tensions and at the time of the wage negotiations in most euro area countries. · next year
2. These are likely to affect the short- term inflation expectations.
3. +33 158 55 60 49 alain.durre@natixis.com Mellina DAHMANE mellina.dahmane-ext@natixis.com Discover more on our Website EMEA MACRO SNAPSHOT 2 Scorched supply: Why heatwaves are fuelling inflation, not necessarily growth Impact on heatwaves on the economy: Stylized facts In theory, heatwaves are expected to affect negatively (positively) the economic activity (inflation) through various channels.