Europe: ECB will temporarily shelve its victory declaration on inflation stability
2023-12-05
■Despite the accelerated tone of inflation in the Eurozone, the ECB remains wary of another short-term acceleration of inflation
■In labor-intensive industries, the trend of slowing inflation is changing, and the ECB's interest rate cut decision may be made after next spring
After the United States, the slowdown in inflation in the eurozone has also become apparent. According to preliminary data from the Eurozone Consumer Price Index (HICP) released on November 30th, the overall index (up 2.4% year-on-year) shows that the growth rate of core HICP excluding energy, food, alcohol, and tobacco (up 3.6% year-on-year) has dropped to a lower level for the first time since July 2021. The main reason is a significant decrease in energy (a year-on-year decrease of 11.5%), but the growth rate of industrial products and services is also slowing down. Overall, the acceleration of inflation is somewhat constrained. It is worth noting that due to the slight decrease in the energy price index after reaching its peak in October last year but maintaining a high level if the current level continues, it is expected that the contribution of the year-on-year decline in March next year will be weakened.
The European Central Bank (ECB) is also aware of this, and President Lagarde stated at a hearing of the Economic and Financial Committee of the European Parliament on November 27th that it is still too early to announce a victory over inflation stability. At the hearing, she mentioned the following points as the current understanding of the ECB: (1) Due to fundamental effects, the rate of increase in HICP may accelerate again in the coming months; (2) Except for projects with high import ratios, the core inflation rate, excluding food and energy, has not significantly decreased; (3) The recent inflation is mainly influenced by domestic factors rather than overseas factors; (4) The main reason for inflation is the ongoing wage pressure, although the current trend of real wage decline (referred to in the report as the "catch-up effect") is weakening. In addition, she also mentioned that the impact of wage increases on actual wages is currently weakening.
The data also confirms the ECB's understanding. In the November Eurozone Business and Consumer Survey released on November 29th, the expected sales price index of enterprises in the service and construction industries turned higher. Although the level has dropped significantly to the lowest point since last year's peak, the trend of slowing inflation in labor-intensive industries seems to be slowing down. In addition, although the consumer's expectation index for price trends in the next 12 months has decreased in November, the overall lowest level since July has rebounded.
Considering the current situation, even though the ECB's necessity for additional interest rate hikes has decreased, some parts of the financial market are still looking forward to interest rate cuts. However, in the absence of a sharp change in economic conditions, after confirming the inflation tone after March next year, the possibility of the ECB considering interest rate cuts may increase.
■In labor-intensive industries, the trend of slowing inflation is changing, and the ECB's interest rate cut decision may be made after next spring
After the United States, the slowdown in inflation in the eurozone has also become apparent. According to preliminary data from the Eurozone Consumer Price Index (HICP) released on November 30th, the overall index (up 2.4% year-on-year) shows that the growth rate of core HICP excluding energy, food, alcohol, and tobacco (up 3.6% year-on-year) has dropped to a lower level for the first time since July 2021. The main reason is a significant decrease in energy (a year-on-year decrease of 11.5%), but the growth rate of industrial products and services is also slowing down. Overall, the acceleration of inflation is somewhat constrained. It is worth noting that due to the slight decrease in the energy price index after reaching its peak in October last year but maintaining a high level if the current level continues, it is expected that the contribution of the year-on-year decline in March next year will be weakened.
The European Central Bank (ECB) is also aware of this, and President Lagarde stated at a hearing of the Economic and Financial Committee of the European Parliament on November 27th that it is still too early to announce a victory over inflation stability. At the hearing, she mentioned the following points as the current understanding of the ECB: (1) Due to fundamental effects, the rate of increase in HICP may accelerate again in the coming months; (2) Except for projects with high import ratios, the core inflation rate, excluding food and energy, has not significantly decreased; (3) The recent inflation is mainly influenced by domestic factors rather than overseas factors; (4) The main reason for inflation is the ongoing wage pressure, although the current trend of real wage decline (referred to in the report as the "catch-up effect") is weakening. In addition, she also mentioned that the impact of wage increases on actual wages is currently weakening.
The data also confirms the ECB's understanding. In the November Eurozone Business and Consumer Survey released on November 29th, the expected sales price index of enterprises in the service and construction industries turned higher. Although the level has dropped significantly to the lowest point since last year's peak, the trend of slowing inflation in labor-intensive industries seems to be slowing down. In addition, although the consumer's expectation index for price trends in the next 12 months has decreased in November, the overall lowest level since July has rebounded.
Considering the current situation, even though the ECB's necessity for additional interest rate hikes has decreased, some parts of the financial market are still looking forward to interest rate cuts. However, in the absence of a sharp change in economic conditions, after confirming the inflation tone after March next year, the possibility of the ECB considering interest rate cuts may increase.