A change of pace in monetary policy is approaching. Inflation in the eurozone slowed sharply in August to 2.2%, on par with the figure in Spain, which also moderated to 2.2%. Inflation in the community zone fell by four-tenths below the 2.6% increase recorded in July, according to forecasts released this Friday by the community statistics office, Eurostat. Inflation is now just a few tenths of a point below the idyllic 2% target underlined by the European Central Bank (ECB), and shows signs that the inflationary crisis caused by the Covid-19 standstill, the war in Ukraine, and the disruptions in the supply chain are coming to an end. The rapid path of disinflation in August opens the door for the change of cycle in monetary policy to accelerate.
The moderation of European inflation was largely driven by the fall in the CPI in Germany – which this week registered 1.9% – as well as the slowdown in prices in the Spanish shopping basket, which fell by six-tenths to 2.2%, exceeding economists’ forecasts. France, the second European power, also registered a fall to 2.2% this Friday, although the figure was above what economists had projected.
Likewise, the key factor in the downward path of inflation has been the evolution of the electricity markets in the Old Continent, and the deceleration of energy prices to 3%, although the highest prices in the wholesale market (the so-called pool) continue to move to the Iberian Peninsula this summer. If the role of energy on prices is excluded, underlying inflation in the European region remains at 2.7%.
Belgium (4.5%), Estonia (3.4%) and the Netherlands (3.3%) are among the eurozone countries whose cost of living has increased this month. Belgium, whose inflation has doubled over the year, continues to struggle with the unbridled rise in energy prices. The opposite phenomenon is observed in the western part of the Old Continent, where the countries with the cheapest shopping basket are located: Lithuania (0.7%), Latvia (0.9%) and Slovenia, Finland and Ireland, which register 1.1%. The biggest rise in inflation this month is observed in the services sector, which rises by two-tenths to 4.2%, and food by 2.4%.
Despite the good, and fast, development of inflation, there is still some resistance within the leadership of the European banking supervisor. Isabel Schnabel, the German representative on the ECB board, insisted on Friday that “the pace of monetary policy easing cannot be mechanical, but must be based on data and analysis” at a conference in Estonia. Schnabel stressed that although disinflation has advanced rapidly, underlying inflation remains persistent, particularly in the services sector. Despite this, she stressed that medium-term price stability “does not require services inflation to slow to 2%.”
On the US economic front, the Jackson Hole meeting also gave good signs of a new cycle at the Federal Reserve. Kevin Thozet, a member of Carmignac’s investment committee, has calculated that “Powell is expected to give the green light to lowering interest rates at the meeting on 18 September” after having kept rates at their highest level in 20 years for more than a year. This, according to Thozet, “will trigger the start of a monetary easing cycle, for which we expect a rate cut of 25 basis points per meeting for the rest of the year.”
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