Europe | Inflation: seeking respite

Summary

Monitoring and forecasting inflation in Europe in recent quarters has been a real headache for analysts, with continuous upward reviews due to a steady succession of unforeseen shocks that are not down to typical demand or oil price pressures.

Key points

• Key points:
• Inflation began to rise following the strong recovery in post-COVID-19 spending. This was then exacerbated by bottlenecks along global value chains, and ultimately by the effects of the war in Ukraine, which has had a negative impact on food and, above all, natural gas prices.
• It rose tentatively above 2% in early 2021, only to spiral to the latest figure of 10.7% in October this year. Moreover, predictions that inflation might have been peaking have been put back and there is now considerable uncertainty. However, long-term inflation expectations have not unanchored, nor have significant increases in salaries and margins been observed.
• The recent October figure, with inflation hitting a record (and unwelcome) high of 10.7% in the eurozone, shows that energy prices have spread from fuel and electricity bills to many other products.
• The measures introduced by governments to reduce energy prices moving forward may add considerable volatility to headline inflation figures. In the absence of such measures, it is entirely possible that we could reach December with figures above 10.5%.
• At the most recent meeting of the ECB, Lagarde attached greater significance to a probable recession in the coming months than to the rise in inflation, though it remains to be seen whether the ECB will stick with this message following the nasty surprise in October.

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