The main problem of the eurozone remains the steadily high growth of the core consumer price index, in this scenario, the peak of inflation there may occur in January-February 2023. Alina Poptsova, an analyst at Freedom Finance Global, told Izvestia about this on December 7.
On the eve of the economist of the European Central Bank (ECB) Philip Lane said that inflation in the euro area is close to the peak level. According to him, a further increase in interest rates may also be required in the near future.
“The persistence of core inflation is driven by supply shocks and the ‘stretched’ impact of high energy prices on supply chains. No significant slowdown is expected until mid-2023. Economic growth is not slowing down as fast as expected, which limits the disinflationary impact of weakening demand,” Poptsova explained the inflation calculation process.
She also added that by the end of next year, the growth rate of the overall consumer price index (HCPI) could slow to 5.7%. In addition, core inflation could slow to 3.9%. According to her, one of the reasons for this could be the slowdown in energy prices, the annual rate of which decreased from 41.5% to 34.9%.
The expert noted that inflation remains sensitive to possible external shocks in the energy market.
“The pro-inflationary factor supporting consumer demand remains a strong labor market and low unemployment, which fell to a new low of 6.5%. In the context of inflation, there is a high risk of developing a wage-price spiral in the case of workers’ demands for higher wages,” the analyst noted.
She recalled that the metallurgical union in Germany IG Metall recently concluded a deal with employers to raise wages by 5.2% next year and by 3.3% in 2024. According to her, this is lower than the predicted inflation rate, but does not exclude the possibility of new requirements in the future.
Poptsova added that the main factor in easing price pressure is the weakening of global demand. With a moderate recession and a slowdown in real consumer spending, this will exacerbate disinflation in goods next year, she said.
“The ECB raised the refinancing rate from zero by 200 basis points (bp). It is expected that the slowdown in inflation in November will allow the ECB to reduce the step in raising the rate to 50 bp. December 15, ”the analyst predicted.
In her opinion, by the end of the year the refinancing rate is likely to be 2.50%. At the beginning of 2023, the ECB is expected to continue to increase to 2.75% by March and will keep the rate at this level until the end of the year.
At its October meeting, the ECB raised rates by 75 basis points for the second time in a row. The base lending rate has increased to 2%, the maximum level since the beginning of March 2009. The rate on deposits reached 1.50%, on short-term loans from the ECB – 2.25%. It was noted that further increases in interest rates are expected to ensure a timely return of inflation to its medium-term target of 2%.
On October 14, ECB Vice President Luis de Guindos Jurado admitted the possibility of a technical recession in the euro area in the coming months. He also said that inflation will be at 10% until the end of this year and will begin to gradually decline in 2023.
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