Consumer demand has been a bigger driver of inflation in the US than in the eurozone, according to research by the European Central Bank that foresees continued weaker underlying price pressures in the currency bloc.
Higher headline inflation in the eurozone had largely been driven by higher energy prices, said the ECB economic bulletin. However, underlying price pressures had increased more gradually in the bloc than in the US and were expected to remain lower in the near term.
“A stronger consumption-driven recovery in the US has been a key driver of differences between underlying inflation in the two economies,” noted Gerrit Koester in the research published on Tuesday, adding that the near-term growth outlook was weaker for the eurozone than for the US.
The ECB forecast eurozone headline inflation to be 6.3 per cent in 2023 and 3.4 per cent in 2024, higher than in the US, as a result of the eurozone’s greater exposure to energy price shocks related to Russia’s invasion of Ukraine.
However, excluding core food and energy prices, inflation is expected to be 4.2 per cent in 2023 and 2.8 per cent in 2024, which is “somewhat lower” than in the US, according to the bulletin, and closer to the ECB’s 2 per cent target. It attributes this to the impact of higher energy prices and a less tight labour market in the eurozone.
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Lower core inflation decreases the pressure on central banks to raise interest rates. Markets are pricing in an 80 per cent probability of a 50 basis point increase in interest rates from the current 2 per cent when the ECB meets on February 2. Another 20 per cent probability is for a larger 75bp increase. The ECB has raised rates by 2.5 percentage points since June last year.
The ECB bulletin, which is published eight times a year, forecast that the eurozone would enter recession between the last quarter of 2022 and the first quarter of this year.
Separate data from Eurostat on Tuesday showed eurozone house prices rose at the slowest rate in nearly two years as rising borrowing costs made property purchases more expensive. In the third quarter of 2022, the annual pace of house price rises slowed to 6.8 per cent from 9.2 per cent in the previous quarter, the slowest rise since the first quarter of 2021.
In the US, the contribution of demand to core inflation recently reached 2 percentage points, compared with 1.5 percentage points in the eurozone. In November, energy inflation alone accounted for 38 per cent of the eurozone’s headline inflation — compared with 14 per cent in the US.
The rise in energy prices and depreciation of the euro had reduced household disposable income, with the bulletin noting a “strong impact” on demand for durable goods. The ECB called on member states to continue with targeted support to shield businesses and households from high energy prices.
While the projections suggest governments’ support schemes are broadly fiscally neutral, neither stimulating nor restricting demand, they may become expansionary if the policies are extended throughout the year.
“To ensure that fiscal policies do not add to inflationary pressures while safeguarding debt sustainability and supporting the growth-friendliness of public finances, it is important that policies are targeted, tailored and temporary,” warned the ECB.
Source: Economy - ft.com
