Inflation is basically back to target in Europe.
I can hear the jeers and protests now. I didn’t say there weren’t caveats. There are. Not least of which is that the headline rate may well re-accelerate on base effects and math tied to fiscal measures that dampened the impact of last year’s energy crunch.
But when it comes to inflation news in the developed world, policymakers will take whatever wins they can get. And the preliminary read on headline euro-area inflation for November was 2.4%.
The flash print, released by Eurostat on Thursday, came in below every estimate. It marked the seventh consecutive decline for the annual rate, and the 12th in 13 months.
It was the coolest headline since July of 2021. The ECB, which was grappling with double-digit price growth a year ago this month, can now see base camp (so to speak).
“For the ECB, signs of an imminent victory on inflation are mounting,” ING’s Bert Colijn said Thursday, adding that although policymakers remain concerned about wage growth and “possible spikes in the energy market,” current policy settings probably count as “sufficiently restrictive.”
Regular readers are probably tired of hearing this, but to reiterate: The monetary policy transmission channel operated fairly efficiently in Europe this cycle, which surprised me frankly. I’ve long questioned the sustainability of a setup wherein a single monetary authority presides over disparate economies all running different fiscal policies, and I assumed government measures aimed at shielding consumers and businesses from the worst of the energy crunch would complicate things further.
And yet, various signposts repeatedly suggested the ECB’s hikes worked largely as intended. Banks tightened standards and lending data released earlier this week showed the first annual decline in more than eight years.
Although core inflation remains well above target, the 3.6% flash read for November was the coolest since April of 2022. Services inflation ran at 4% this month, far too fast, but note that it was 5.6% a mere four months ago.
The real policy rate (and I’m just using the depo rate and headline CPI) was negative 9% this time last year. It’s positive 1.6% now. That’s a marked turnaround in a very compressed window.
The Governing Council will surely retain a cautious bias for as long as it’s feasible, but Germany is likely headed for another year of stagnation and revisions to Q3 growth data released Thursday showed the French economy contracted last quarter.
Markets are anxious for rate cuts, as is their wont. A cut is fully priced for the first half of 2024, and traders expect four cuts over the course of the year, with very high implied odds of a fifth.
“When will they dare to admit” victory? ING’s Colijn wondered, of the GC. The bank expects the first cut by summer.
If there are doubts that rate hikes are what brought inflation down in the US, would that not be more so in the EU, where energy and other commodities were such a large part of inflation?
perhaps Europe generally is much closer to / or already in recession compared to the US…that could account for differences in inflation…
I agree that the EU exonomy wasn’t doing as well as the US (especially with the debt challenged countries) but maybe another factor is culture: Europeans are far more personally fiscally responsible (much less use of credit and mortgages). With high interest rates they’re even less likely to spend (unlike us spendthrifts burning through savings and right on to credit). Voila!