The ECB X-ray of inflation

By Leonidas Stergiou

The European Central Bank has deconstructed the data affecting inflation to date, taking into account the data affecting its course and market forecasts, in order to conclude that the 2% threshold will be seen after the first half of 2023.

According to the data analyzed by the ECB, inflationary pressures from energy and problems in supply chains will continue until mid-2022. For this reason, the ECB predicts that inflation will continue to rise in the coming months. After peaking in the middle of the year, it will start a gradual decline that will bring inflation around 4% by the end of 2022 and below 2% by the end of 2023.

Because inflation is the change in prices on an annual basis, its decline means a reduction in the rate of price increase and not a fall in prices. In order for prices to fall, there must be deflation, that is, negative inflation. According to the ECB, when inflation in the Eurozone reaches 2% or lower, then in some products and services, but also in some countries, there may be a negative change in prices.

The “pieces” of inflation

The above forecast is based mainly on the data related to the main components that trigger inflation, ie the prices of energy products and mainly fuels. It is also based on the estimation that the problems in the supply chain will continue to exert inflationary pressures in 2022, while there are still no clear data on the duration of the impact of the VAT refund in Germany. This is because there is already a spread of energy costs in food and non-energy industrial products. The only positive sign is the marginal price restraint on services. At the same time, wage increases are on the verge of productivity.

In particular, the analysis of 4.9% inflation in November in its components shows that:

– 2.5 percentage points, ie more than half, is affected by energy prices and more specifically by fuel.

– 1 percentage point is the contribution from the prices of food and non-energy products, where there were price increases as the cost of energy passed from October onwards.

– In services there was a slight price restraint.

– The return of VAT in Germany continues to have the same aggravating effect on inflation in 2022 and, most likely, will continue in the coming months.

– The impact of the low 2020 benchmark has disappeared.

Increases in energy

According to the ECB analysis, the biggest, main, inflationary pressure comes from the significant increases in liquid fuels, as they contribute with about 15 percentage points to the overall increase by 27% of total energy prices. With 5 percentage points participate natural gas and with 5 also percentage points electricity.

Wage cost

The effect of wage costs is a key indicator for the ECB’s forecasts for inflation below 2% in the medium term. According to the data at its disposal, the wage adjustments, ie the wage negotiations that have been completed so far, remain small and even slightly declining.

The rate of increase in wages per employee has slowed down significantly compared to last year, as the number of working hours per employee has increased dramatically, and there is a decrease in hourly wage costs.

According to the ECB, the companies with which it is in contact do not convey the message that they will proceed to large wage increases in 2022 that would cause an inflation avalanche and perpetuate high inflation in the long run.