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Core inflation forecast for the euro area will remain lower than in the US


Consumer demand is a bigger driver of inflation in the US than in the euro area, predicting continued weaker underlying price pressures in the currency bloc, according to European Central Bank research. bad.

Higher title euro zone inflation largely driven by higher energy prices, said ECB economic bulletin. However, underlying price pressure has increased more gradually in the bloc than in the US and is expected to remain lower in the near-term.

Gerrit Koester noted in research published on Tuesday that the eurozone’s near-term growth outlook is weaker than that of the US, “which implies that the dynamics from economic activity on inflation will still smaller than in the euro area.”

The ECB forecasts eurozone headline inflation of 6.3% in 2023 and 3.4% in 2024, higher than in the US, as the eurozone is more vulnerable to energy price shocks. related to Russia. Invasion of Ukraine.

However, excluding core food and energy prices, inflation is expected to be 4.2% in 2023 and 2.8% in 2024, “slightly lower” than in the US, according to the report. newsletter, and close to tECB’s 2% target. It attributes this to the impact of higher energy prices in the eurozone and less tight labor markets.

Lower core inflation reduces pressure on central banks to raise interest rates. Markets are pricing in an 80% chance rates will rise by 50 basis points from the current 2% when the ECB meets on Feb. 2. The other 20% is a 75 basis point increase. The ECB has raised interest rates by 2.5 percentage points since last June.

The ECB Bulletin, published eight times a year, forecasts that the euro area will enter recession from the last quarter of 2022 to the first quarter of this year.

“The stronger consumer-led recovery in the US is the main driver of the divergence between core inflation developments in the two economies,” Koester said.

In the US, demand’s contribution to core inflation recently reached 2 percentage points, compared with 1.5 percentage points in the euro area. In November alone, energy inflation accounted for 38% of overall eurozone inflation – compared with 14% in the US.

Rising energy prices and a depreciating euro have reduced household disposable income, with the report noting a “strong impact” on demand for durable goods. The ECB urges member states to continue providing targeted support to protect businesses and households from high energy prices.

While projections suggest that government assistance programs are generally fiscally neutral, neither stimulating nor limiting demand, by 2023 they could become expansive if governments Books are expanded throughout the year.

In order to ensure that fiscal policies do not add to inflationary pressures while preserving debt sustainability and supporting growth-friendly public finances, it is important that policy must be targeted, relevant and temporary”.

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