As in the United States, consumer prices in the eurozone have risen faster in recent months than most economists and policymakers expected. The data has raised questions for investors, businesses and households about the credibility of the central bank’s claims that this period of high inflation is likely to prove to be transitory.
Many private economists are forecasting a significant drop in euro area inflation at the start of the year, echoing the ECB’s view that the period of rapid price increases will be short-lived. Companies sharing this point of view are UBS, Morgan Stanley, BNP Paribas and Oxford Economics.
“There is a lot of pressure on central banks,” said Reinhard Cluse, an economist at UBS. “But the ECB will stick to the transitional narrative, which we think is correct.”
However, with inflation set to stay well above the ECB’s target for the first six months of 2022, a series of wage increases and further self-reinforcing price hikes remain possible, while the ultimate severity and duration of supply chain problems and their effect on prices is uncertain.
The European Union’s statistical agency is expected to estimate on Tuesday that prices were between 4.3% and 4.5% higher in November than a year earlier.
This would mark the fastest annual rise in prices since the record began in 1997. In those 24 years, the inflation rate has only exceeded 4% in two months, the first being July 2008 and the second. October of this year.
The ECB is expected to state its expectations for 2022 in December. But policymakers are unlikely to announce measures to counter the spike in inflation, other than confirming that a bond buying program launched to mitigate the inflation. economic impact of the pandemic will end in March.
They will likely repeat their view that the euro area inflation rate will decline until 2022 and fall below its target of 2% in 2023. This decline should start with a sharp drop in the pace of inflation. prices in january.
One of the reasons is Germany’s efforts to support its economy during the first months of the pandemic. In July 2020, the government of the largest member of the euro area cut its value-added tax rates for six months. This meant that consumer prices from July 2021 were compared to artificially low prices from a year earlier, exaggerating inflationary pressures. As of January 2022, this will no longer be the case, as tax rates have returned to their pre-pandemic levels in early 2021.
But after the fall in January 2022, the fall in inflation should be less pronounced in the following months, and largely due to the fall in energy prices. Natural gas prices, which have set the tone for wider European energy markets, have reached record highs in recent months, but futures markets suggest they are expected to pull back significantly in 2022.
Morgan Stanley economists estimate that 2.2 percentage points of the 4.3% inflation rate they expect to see as November’s peak will come from energy. This is a larger share than in the United States, which highlights the differences in the rise in inflation. While the prices of manufactured goods and services have increased at a faster pace in the euro area, they have not risen as sharply as in the United States
According to a measure compiled by the Organization for Economic Co-operation and Development that excludes energy and food prices, core inflation in the United States was more than twice the euro area rate in October .
One reason for this could be that government financial assistance to households induced by the pandemic was larger in the United States than in the eurozone, Morgan Stanley economists wrote in a note to clients.
More fundamental forces are also likely at play. In the decade leading up to the pandemic, the euro area economy grew more slowly than that of the United States and inflation was lower. The euro area has a faster aging population, which economists say weakens inflationary pressures.
At the end of 2022, some economists see euro zone inflation hovering again around 1%, to the chagrin of the ECB. While high inflation rates are seen by most policymakers as a temporary challenge, they are more concerned about the risk of the euro zone falling into the kind of low inflation trap that Japan was unable to achieve. escape.
Some economists see the current period of high inflation in the euro area providing a lasting boost to the ECB’s efforts to keep price increases at around 2%, which it failed to do for much of the past. the last decade.
Luigi Speranza, chief economist at BNP Paribas, is among those who believe that by tolerating soaring inflation without raising rates, the ECB can send a signal that it is determined to see prices rise to its target rate. medium term.
“Price pressures are expected to intensify in a more sustainable way,” he said. “It’s a turning point.”
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