On the face of it, the November flash HICP figures brought a welcome decline in headline inflation from 10.6% to 10.0%. However, we think the evidence for a similar peak in underlying inflation pressures is less clear-cut and ‘stickily’ high core inflation could remain a concern for ECB for some time yet.
Firms continue to pass-on higher input costs to consumers and in spite of an approaching recession, we expect this process of cost-push inflation to extend into 2023, keeping price pressures elevated for longer. Despite the moderation in natural gas and electricity prices, delayed pass-through to household bills will mean energy price inflation will abate only gradually, while the downside risk from price caps seems limited. Core inflation will prove sticky in our view, due to second round effects from higher energy, material, but also labour costs.
We forecast euro area HICP inflation to average 7.2% in 2023 and 2.9% in 2024. Core inflation will return to the ECB’s target only in H2 24. In light of ongoing cost-push inflation, we think markets are underestimating the ‘stickiness’ in euro inflation, with the green transition and higher than expected wage growth still presenting upside risks.
