Inflation – too soon to celebrate

Inflation in the euro area has recently come down significantly.

Dr Jörg Krämer

Commerzbank Economic Research

January 22 2024

But the 1970s teach us that this means little – especially if wages continue to rise strongly. The ECB should not celebrate too soon.

Consumer prices have barely risen recently, ...

At first sight, the inflation problem seems to be close to being solved. Over the past three months, consumer prices in the euro area, excluding volatile energy and food prices, have barely risen; on an annual basis the underlying price increase is only one percent. Many financial market professionals extrapolate this moderate inflation trend into the future and consider the inflation problem to be over. They therefore expect the ECB to decide on its first interest rate cut of a quarter of a percentage point as early as April – and nearly five more such cuts by the end of the year.

... because slowing inflation in energy and food is feeding through to core inflation, ...

The recent moderate inflation data has much to do with the slowdown in energy and food inflation and the end of supply bottlenecks. This is also leading to slower increases in industrial goods prices and even spilling over into services prices. After all, food is important for catering and energy for transport services.