Inflation in the euro zone is confusing economists

Has the Eurozone reached its inflation peak? Eurozone harmonized inflation (HICP) came in slightly lower than expected for December on December 6 thanks to falling energy prices, coming in at 9.2% over the year, following Eurostat’s first estimate of 10.1% in November. But over the year, core inflation accelerated to 6.9% excluding energy and food and 5.2% excluding alcohol and tobacco. This should encourage the European Central Bank (ECB) to continue raising its key interest rate to 3.50% in the coming months.

According to experts, the peak of “headline” CPI inflation, which was 10.6% at the end of October, has passed, and it seems that the index should not return to this level again this year. Samy Chaar, chief economist at Lombard Odier, sees “Three main reasons: Slowing Eurozone demand, improving supplies and supply chains and falling energy prices (still +25.7% in one year, editor’s note) at an unexpected level of €70/MWh for natural gas, compared to the ECB’s assumption of €124/MWh in 2023. The level of storage and supply of liquefied natural gas (LNG) capable of compensating for the lack of Russian gas makes it so. “The worst scenario of an energy crisis can be ruled out. Prices may still rise, especially with the lag effect associated with the end of energy shields, but they will remain on average below the 2022 average and the base effect on the index will be smaller.. Even though food prices rose 13.8% on Friday, the logic should be the same for this other position in the index.

When it comes to core or “core” CPI inflation, the price of services is still rising (+4.4% over the year), but more in line with the impact of energy prices than wage growth (+3%). This should continue for a few more months, but it seems unlikely that the lag effect associated with current energy prices and wage negotiations at the start of the year will still be reflected in the second half.

What expectations?

Between these uncertainties and the impact of the ECB’s aggressive monetary tightening, economists seem a bit lost… According to Bloomberg’s December consensus of 30 banks, year-end inflation in the Eurozone will be 3.5%. The average is 2023, but there is significant variation among respondents. It will be 4.2% for Nomura, 4.8% for TD Securities, 5% for Goldman Sachs and even 6.2% for BMO Capital, but next December 2.6% for Barclays, 2.3% for UBS and even down to 1.8% for Oxford Economics. ! A breakdown of one-year expectations that is no longer common among professionals in the United States. “It is difficult to predict inflation after three monthsAxa mentions Jonathan Baltora, head of the IM inflation office. Economists at the same banks we polled, on the other hand, show very homogeneously a turnaround around the target at the end of 2024 for headline and even core inflation.

“This winter’s significant drop in energy prices will be accompanied by a sharp economic slowdown (-0.3% in 2023 and 0.9% in 2024) and therefore inflation (2.7% at the end of 2023 and 2024- 2%) at the end of the year may change / weaken our forecasts. , but the ECB is set to raise its key interest rate and keep it at 3.50% for almost a year: it is so high above the neutral rate that it cannot be unaffected by demand, corporate margins and investment., also analyzes Bank of America (BofA) Europe economist Evelyn Herrmann. This laments the still very asymmetric approach to inflation/growth risks in the ECB’s recent forecasts.

“I wouldn’t be so pessimistic: we are too close to two increases to 3% to imagine stopping, but a change is possible before the May or June meetings.”referee Samy Chaar. “We have just passed the peak (June 2022), long after the US. So the ECB still has a good game to make a ‘hawkish’ appearanceJonathan confirms to Baltor. But what will count is ‘momentum’, and it will stop raising interest rates as soon as it thinks inflation is ‘under control’. If it does not, it will be forced to do so by an inversion of the curve, which is very punishing for transmission through markets and the credit channel.It noted that expectations for inflation to return to target at the end of 2024 were mixed, and that ECB rates remained roughly unchanged.

Longer term, “Inflation may be slightly higher than in the past and, above all, more volatile, which will cause the Fed and ECB to become more reactive, as emerging central banks do.”Jonathan continues to Baltor. “Let’s hope the ECB, which is less pragmatic and more dogmatic than Mario Draghi, is not always six months behind.”concludes Sami Chaar.

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