Eurozone Inflation Preview: What to Expect from December’s Data

In
November,
the
greatest
contributors
to
euro
area
inflation
were
services
(+1.69
percentage
points,
pp),
followed
by
food,
alcohol
&
tobacco
(+1.37
pp),
non-energy
industrial
goods
(+0.75
pp)
and
energy
(-1.41
pp).

Stagnation
Is
a
Greater
Risk
than
Persistent
Inflation

According
to
Tomasz
Wieladek,
Chief
European
economist
at
T.
Rowe
Price,
“in
the
absence
of
further
commodity
shocks
than
currently
expected,
inflation
could
fall
more
rapidly
toward
the
ECB’s
2
percent
target.”

Wieladek
warns
against
the
risk
of
a
return
to
pre-pandemic
era
stagnation.
“This
is
a
greater
risk
than
persistent
inflation,”
he
said.
“If
the
ECB
tightens
too
quickly,
it
could
plunge
inflation
back
below
2
percent,
pushing
the
Eurozone,
once
again,
into
stagnation.”

Eurozone
inflation
peaked
in
October
2022
at
10.6
percent
before
declining
to
2.4%
in
the
most
recent
read
last
November.
Core
inflation,
the
rate
excluding
food
and
energy
prices,
remains
higher
at
3.6%,
but
the
disinflation
process
appears
to
be
well
underway.

“Looking,
then,
at
commodity
prices,
which
have
been
stable
for
several
months,
and
economic
activity,
which
has
normalized
after
the
post-Covid
excesses,
there
is
no
reason
to
think
that
the
disinflation
process
will
be
interrupted
in
the
months
ahead”,
said
Andrea
Conti,
Chief
of
macro
research
at
Eurizon.

Scenarios
for
an
Interest
Rate
Cut

Entering
2024,
inflation
data
remain
a
key
factor
for
monetary
policy,
but
the
ECB
will
also
take
the
economic
cycle
into
account.

In
the
third
quarter
of
2023,
seasonally
adjusted
GDP
decreased
by
0.1%
in
the
euro
area
compared
with
the
previous
quarter,
according
to
an
estimate
published
by
Eurostat.
In
the
second
quarter
of
2023,
GDP
had
increased
by
0.1%.

“There
are
two
scenarios
under
which
the
ECB
is
likely
to
initiate
a
round
of
rate
cuts:
first,
if
growth
is
weaker
than
expected;
second,
if
inflation
falls
toward
the
2
percent
target
faster
than
expected,”
according
to
Wieladek.

Will
Market
Euphoria
Last?

Financial
markets
have
already
moved
ahead
and
priced
in
a
round
of
rate
cuts,
but
this
scenario
will
have
to
be
confirmed
by
data
in
the
coming
months.

“Fundamentally
what
drove
the
market
rally
in
December
was
the
belief
that
central
banks
are
ready
to
cut
interest
rates
and
that
the
macroeconomic
environment
will
be
more
supportive
for
equity
markets
in
2024”,
said
Michael
Field,
European
Equity
Strategist
at
Morningstar.
This
situation
has
not
changed,
and
ultimately
the
inflation,
jobs
data
etc
released
in
the
meantime
has
been
supportive
of
this.
So,
from
that
perspective
the
momentum
behind
the
rally
is
still
there,
which
means
it
could
continue.
The
only
downer
on
the
party
is
valuation.
European
markets
have
just
recently
moved
from
behind
slightly
undervalued
to
being
slightly
overvalued.”

Antonio
Cavarero,
Head
of
Investments
at
Generali
Insurance
Asset
Management,
also
sees
room
for
enthusiasm
from
the
end
of
last
year
to
last
into
the
beginning
of
2024,
though
“it
will
be
important
that
data
in
the
coming
months
can
confirm
what
the
markets
have
already
priced
in.
Indeed,
there
is
a
possibility
that
the
effects
of
tightening
monetary
policies,
the
relative
difficulty
of
some
large
economies
such
as
Germany
and
China
may
prompt
more
conservative
assessment
of
riskier
investments.”

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