Eurozone Inflation Preview: Are Consumer Prices Falling?

The
January
Harmonized
Index
of
Consumer
Prices
(HICP)
–
a
measure
of
inflation
in
the
Eurozone
–
is
expected
to
show
a
2.7%
increase
on
the
year
before,
according
to
the
FactSet
consensus
estimates.

“After
the
rise
in
inflation
in
December,
investors
will
be
relieved
to
learn
that
economists
now
expect
inflation
to
have
fallen
in
January,
continuing
the
decline
that
all
of
us
celebrated
for
much
of
2023,”
said
Michael
Field,
European
market
strategist
at
Morningstar. 

In
December,
the

highest
contribution
to
the
annual
euro
area
inflation
rate
came
from
services
(+1.74
percentage
points,
pp),
followed
by
food,
alcohol
&
tobacco
(+1.21
pp),
non-energy
industrial
goods
(+0.66
pp)
and
energy
(-0.68
pp).

“While
still
some
way
off
the
ECB’s
2%
target,
the
direction
of
travel
of
inflation
is
firmly
to
the
downside,
the
inevitable
effect
of
record
high
interest
rates.
Pleasingly,
core
inflation,
the
measure
the
central
bank
is
really
focused
on,
is
also
expected
to
fall
by
10
basis
points,
to
3.3%,”
said
Field.  

ECB:
Interest
Rate
Cuts
Are
Working

In
the
January
post-meeting
statement,
the
ECB
said:
“Aside
from
an
energy-related
upward
base
effect
on
headline
inflation,
the
declining
trend
in
underlying
inflation
has
continued,
and
the
past
interest
rate
increases
keep
being
transmitted
forcefully
into
financing
conditions.
Tight
financing
conditions
are
dampening
demand,
and
this
is
helping
to
push
down
inflation.”

Geopolitical
tensions
are
an
upward
risk
for
inflation,
especially
if
the
tensions
in
the
Red
Sea
escalate,
but
these
impacts
could
be
limited.

“The
risk
of
escalation
is
concrete
even
though,
paradoxically,
inflation
may
not
experience
major
upward
shocks,”
said
Giacomo
Calef,
country
head
for
Italy
of
NS
Partners.
“Freight
rates
have
risen
significantly,
but
remain
far
from
the
$14,000
observed
during
the
pandemic.
Moreover,
transportation
costs
count
for
only
a
very
small
part
of
the
total
value
of
some
goods
that
weigh
heavily
in
the
Consumer
Price
Index
(CPI)
calculation.”

Eurozone
Wages
Accelerate

In
addition
to
geopolitical
risks,
another
factor
that
could
turn
inflation
up
is
the
increase
in
wages.
Despite
the
stagnation
in
the
Euro
area
in
the
fourth
quarter,
the
labour
market
has
remained
robust.
The
unemployment
rate,
at
6.4%
in
November,
has
fallen
back
to
its
lowest
level
since
the
start
of
the
euro
and
more
workers
have
entered
the
labour
force.
Eurozone
wages
rose
5.3%
in
the
year
to
Q3
2023,
accelerating
from
2.2%
a
year
earlier.
According
to
ECB,
the
first
quarter’s
data
will
be
critical
to
see
if
there
are
signs
of
further
increases.

“The
ECB
remains
cautious
about
the
pace
of
disinflation,
and
will
continue
to
monitor
developments
in
the
labour
market,
which
has
proven
very
resilient.
Strong
wage
growth
and
weak
or
even
declining
productivity
have
led
to
a
sharp
increase
in
unit
labour
cost
growth.
The
ECB
will
closely
monitor
upcoming
wage
agreements,”
said
Valentine
Ainouz,
Head
of
Fixed
Income
Strategy
di
Amundi
Investment
Institute.

Will
the
ECB
Cut
Rates
in
June?

ECB
President
Christine
Largarde
said
that
the
Eurozone
economy
most
likely
stagnated
in
the
fourth
quarter
(data
will
be
released
in
the
upcoming
weeks).
She
also
added
that
“the
incoming
data
continue
to
signal
weakness
in
the
near
term”,
but
the
growth
rate
would
pick
up
further
ahead.

Regarding
future
decisions,
Lagarde
said
that
“our
policy
rates
will
be
set
at
sufficiently
restrictive
levels
for
as
long
as
necessary”.
Markets,
however,
have
perceived
an
accommodative
tone,
with
the
US
dollar
appreciating
against
the
euro
and
lower
yields
pushing
up
bond
prices
after
the
ECB
January
meeting.
A
shifting
in
monetary
policy
is
expected
at
some
point
in
2024
and
several
portfolio
managers
and
economists
are
betting
in
a
first
interest
rate
cut
in
June.

“Given
the
cautiously
accommodative
tone
of
the
last
ECB
meeting,
the
risk
of
a
cut
before
June
is
slightly
increased.
We,
however,
confirm
the
estimate
of
the
first
rate
cut
only
from
June”,
said
Martin
Wolburg,
senior
economist
di
Generali
Investments.

Morningstar’s
Field
added:
“With
the
fight
against
inflation
back
on
track
after
the
blip
in
December,
we
believe
the
ECB’s
attention
can
now
start
to
shift
to
the
European
economy,
which
remains
in
a
fragile
state.
Although
a
resurgence
in
inflation
is
an
outside
concern,
at
this
point
the
central
bank
has
created
some
breathing
room
for
itself
and
is
in
a
strong
position
to
cut
interest
rates
in
2024”. 

Read
the
original
article
in
Italian

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