Inflation isn't defeated yet: Europe experiences a resurgence in price growth
Despite recent improvements in core inflation, Europe is still grappling with the relentless issue that has plagued its economies for the past two years Market optimism fizzles as price rises regain momentum
Europe is still grappling with the significant economic issue that has plagued its economies for the last two years.
In December, annual inflation in Germany and France, the top economies of the European Union, increased, and analysts anticipate that the forthcoming eurozone data will validate this trend. This would mark the first inflation increase across the region since April.
This could dampen the enthusiasm of certain investors who believe that the European Central Bank (ECB) is close to lowering interest rates.
Official estimates released on Thursday show that consumer price inflation (CPI) in Germany rose to 3.8% in December from 2.3% in November. Preliminary data indicates that annual CPI in France increased to 4.1% in December from 3.9% the previous month.
Energy prices in both instances contributed to the increase in the overall inflation rate. Economists had predicted this rise, partly due to the reduction of the subsidies that governments had previously provided to assist households during the 2022 energy crisis.
The Marriner S. Eccles Federal Reserve Board Building is seen on September 19, 2022 in Washington, DC.
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Fed officials discussed rate cuts last month and hinted at end of hikes, minutes show
From late 2021, global inflation has been on the rise following the end of pandemic lockdowns. In response, governments have injected hundreds of billions of dollars into subsidies to protect households and businesses from surging energy prices, which were largely driven by Russia's invasion of Ukraine in February 2022.
As an example, the German government covered gas and heating bills for households in December 2022, helping to curb inflation. However, now that this one-time subsidy has ended, energy prices have experienced fluctuations, and while they have dropped overall, they remain higher than the artificially suppressed levels of the previous year.
The French statistics office said Thursday that the increase in inflation in December was due to "the acceleration over one year in prices of energy and services."
Core inflation looking better
Paul Donovan, UBS Global Wealth Management's chief economist, predicts that core inflation, which excludes unpredictable food and energy expenses, will continue to decrease in the 20 countries that use the euro. "The trend for inflation is still moving towards lower price growth," he informed CNN. "There is currently no indication of fixed prices or higher long-term inflation in any of the data from Europe, the UK, or the US."
"He added that the details of inflation continue to be more surprising on the downside than the upside. Andrew Kenningham, chief Europe economist at Capital Economics, told CNN that he anticipates annual core inflation in the eurozone to decrease to 3.3% in December from 3.6% in November, with further decreases expected after that."
"The more important issue is what happens to core inflation and underlying inflationary pressures," he said.
Markets fizzle
Rapidly increasing headline inflation in major economies could decrease investor enthusiasm for the anticipated early spring interest rate cuts by central banks. This enthusiasm fueled a stock market surge since late October, with Wall Street's S&P 500 index and Europe's benchmark Stoxx 600 index rising by 15% and 11% respectively.
High interest rates usually create stress on stocks as investors tend to prefer bonds that offer steady, comparable returns. However, stocks have not performed well in 2024. The S&P 500 index has dropped 1.1%, and the Stoxx 600 index has fallen 0.4% since the markets reopened on January 2.
Concerns about the trajectory of energy prices have intensified with escalating tensions in the oil-producing Middle East. On Wednesday, Brent, the global oil benchmark, saw a more than 3% increase, closing at $78 a barrel.
A motorist fills her car at a petrol station at Carrefour hypermarket in Premery, France on September 19, 2023.
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The published minutes from the December policy meeting of the US Federal Reserve on Wednesday revealed that officials were hesitant to declare a triumph over inflation and put an end to their nearly two-year long series of rate hikes. The minutes stated that while the Fed's main interest rate was "likely at or near its peak," officials believed it was "necessary for policy to continue to be restrictive until inflation showed sustainable downward movement."
Isabel Schnabel, an executive board member of the ECB, stated last month that inflation was expected to increase temporarily due in part to the expiration of government energy subsidies. "We still have some way to go," she said.
Carsten Brzeski, global head of macroeconomic research at ING, noted in a Thursday report that the re-acceleration of inflation strengthens the ECB's position in maintaining a steady hand and not making any hasty decisions regarding rate cuts. Despite this, he still anticipates the central bank will implement its first rate cut in June.
