Inflationary data is sending clear signals for the entire Eurozone: prices may increase further and thus influence the ECB’s interest rate policy. What can happen?
The inflation alert comes from Germany, with a price increase recorded in December.
German inflation has started to grow again due to base effects, temporarily putting an end to the downward trend observed in recent months.
Inflation, harmonized with that of other European Union countries, rose to 3.8% in December, the federal statistics office reported on Thursday, in line with the expectations of analysts interviewed by Reuters. In November, however, consumer prices had increased by 2.3% on an annual basis.
Economists pay close attention to data from Germany as they usually anticipate what the Eurozone numbers will reveal. With inflation rising again, the ECB mission to ease monetary policy in 2024 becomes more complicated.
Germany: inflation rises. What does that mean for Europe?
German inflation accelerated to the fastest rate in three months in December, casting doubt on investors’ hopes that the European Central Bank will begin cutting interest rates as early as March.
The December surge is largely due to base effects: one-time state aid for natural gas and district heating bills depressed energy costs at the end of 2022, thus increasing comparisons later. In recent months, however, electricity, gas, and fuel prices have fallen, with German regional data suggesting the trend continued in December.
Data from France earlier in the day showed a similar picture to that of Europe’s largest economy, as the withdrawal of public assistance helped push inflation from 3.9% to 4.1%. Price increases in Ireland were also faster, while Spain last week reported they held steady at 3.3%.
In Germany, according to the flash estimate just published, inflation ended five months of declining rates in December, with overall consumer prices (not in the harmonized measure) standing at 3.7% year-on-year, up from 3.2% year-on-year in November.
These numbers are useful for the ECB’s assessments. Carsten Brzeski, global head of macroeconomics at Dutch bank ING, said that the December increase in German inflation and the prospect of a further acceleration in price rises should be enough to fend off expectations of market rate cuts.
Data for the Eurozone as a whole, to be released on Friday, is expected to show that inflation rose from 2.4% in November to 3% in December, ending six months of consecutive declines. The signal is one of utmost caution for the hawkish politicians of the Eurotower.
What to expect in 2024?
Inflation remains the most observed market mover at the beginning of 2024, both in Germany - the European economic engine in crisis - and throughout the old continent.
According to the analysis of ING experts, the weakening of demand due to rising interest rates should lead to a real drop in prices in the coming months. This is already reflected in sales price expectations which have started to fall significantly in the services sector, following the previous trend in the manufacturing sector.
However, the German government’s measures to close the 2024 financing gap in the budget will put new upward pressure on inflation. The return of VAT to the normal 19% for catering services has already been decided and will be added to the rise in prices of CO2 emissions, the introduction of a tax on plastic, a tax on flights, and the end of limits on energy prices as new inflationary factors in 2024. As a result, “we expect German inflation to be around 3% year-on-year in 2024, with risks tilted to the upside”, wrote ING.
The trend could be the same in the Eurozone. Not surprisingly, the ECB remains cautious on inflation. President Christine Lagarde and her colleagues are carefully studying the dynamics of wages. Around half of the workers covered by the ECB’s wage monitoring system will negotiate new agreements in the first half of 2024. The results obtained will be crucial in determining the path of interest rates.
Original article published on Money.it Italy 2024-01-04 15:22:24. Original title: Germania, brutte notizie dall’inflazione (anche per l’Europa). Cosa sta per accadere?
