EZ – Inflation should peak soon

A flash estimate of Eurozone inflation for November will be released next week (November 30). In October, inflation rose further to 10.6% y/y, from 9.9% y/y previously. The main driver was food prices, which increased to 13.1% y/y. In contrast, energy price pressures remained stable at a high level and core inflation also recorded only a slight increase to 5.0% y/y.

Although energy price pressures stabilized, an analysis of the data shows that, on one hand, price dynamics for fuels (petrol and diesel) are falling rapidly. On the other hand, the dynamics for electricity and gas continue to increase. This reflects the rapid increase in electricity and gas prices this summer. Although the situation on the wholesale markets has already eased considerably, we expect inflation levels for electricity and gas to remain high in the coming months, due to the delayed pass-through of prices to households. In contrast, the price dynamics for petrol and diesel will probably continue to decline. As a result, energy price inflation should remain stable in November, according to our assessment.

For the further development of food inflation, the UN's index for global food prices should provide some guidance. This has been showing a strong downward trend since the summer. If this trend continues, food prices at the global level would fall y/y in November. The last time this was the case was in July 2020. We therefore also expect food prices in the Eurozone to lose momentum in the coming months.

However, an analysis of the data shows that, on the global level, foodprices have risen in real terms (adjusted for inflation) to their highest level since 1975. This represents a significant loss of wealth, as consumers around the world are spending a much higher share of their income on food than they did 10 or 20 years ago.

With regard to core inflation, we expect only a very small increase in momentum. With producer prices, which have been a good indicator of core inflation in recent years, already showing signs of a sustained easing, core inflation should also begin to fall gradually from the first half of 2023. Fortunately, producer prices in Germany already fell unexpectedly sharply in October compared to September.

Taking all of these aspects into account, Eurozone inflation could lose some momentum in November for the first time in a long time. However, stabilization or a further slight increase cannot be ruled out entirely. Nevertheless, inflation should also peak in the Eurozone in the near future. We expect inflation to fall steadily in the first half of 2023 at the latest. For 2023 as a whole, we therefore forecast a decline in inflation to 5.6%, from an expected level of 8.4% in 2022. In the short term, Eurozone inflation depends very much on the development of European gas prices.

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