Europe: Issues Facing Inflation After the Peak
2022-11-24
■ Eurozone HICP continues to accelerate its rise, but energy price gains show signs of stopping
■ However, underlying inflation remains high, suggesting the need for continued tightening of monetary policy
The U.S. price index rose at a significantly slower pace in October, as inflation expectations of peaking began to spread. On the contrary, in the Eurozone, the pace of the rise in the Consumer Price Index (HICP, October: up 10.6% from the previous year) did not stop and remains unpredictable for the peak.
In the eurozone, the upward trend in energy prices has intensified since last October, so the year-on-year increase based on the base effect*1 is expected to help dampen the rise in energy prices. In addition, European gas benchmark prices (Dutch TTF futures) have fallen to around a third of their late August peak, so the upward pressure on energy prices themselves is expected to fade. But because of the lag in its reflection in energy prices, it will remain high for the time being, and it will take at least a few more months before inflation hits its peak. In addition, past spikes in energy prices have had a ripple effect, with commodity prices such as food and industrial goods rising and service prices remaining high due to increased costs such as labor costs. The core HICP, which excludes energy, food, alcohol and tobacco, rose 5.0% year-over-year in October, accelerating for the ninth consecutive month and well above the European Central Bank's (ECB) inflation target. The focus of future inflation control will likely be to shift to potential non-energy inflation, as in the U.S.
The ECB publishes the PCCI (Persistent and Common Component of Inflation), which aims to capture common inflationary trends across a wide range of items. The PCCI is calculated as a weighted average of the common components with high correlation between items, excluding country/item-specific fluctuations and measurement error between each item's inflation rate. The ECB looks at the 3-month year-over-year backward moving average of the previous year in order to capture changes in tone and to understand potential changes. Looking at the PCCI trend, although the HICP spiked, the increase slowed for four consecutive months from June to September, indicating a top. rebounded again. In addition, the five-year inflation swap rate, which the ECB used as a reference measure of underlying inflation until the COVID-19 crisis, was temporarily below 2% in July, but has gradually leveled off since August. It is currently hovering above 2.3%. Both of these underlying inflation rates remain high above the ECB's inflation target, suggesting the need to continue tightening monetary policy even after a confirmed inflation peak.
*1 Because of the rounding of the previous year's base, the year-over-year increase will be smaller even if it is the same as the previous month.