Dhe March is likely to be an exciting month in terms of inflation: Then the inflation rate in Germany and the euro zone could fall noticeably. The reason is a so-called statistical base effect: A year ago, in March, immediately after the start of the Ukraine war, energy prices rose exceptionally sharply. Since then, the inflation rate, which compares the current level of consumer prices in a month with that of the same month in the previous year, has been particularly high. According to provisional figures, the rate in Germany in January was 8.7 percent and 8.5 percent in the euro area. From March onwards, however, the current level of energy prices will be compared with that of the period after the start of the war. Then the rates of price increases over the year are no longer quite as high.
There’s a lot at stake: Jens Ulbrich, the chief economist at the Deutsche Bundesbank, expects inflation to calm down to a certain extent from the spring. So can consumers hope for at least a little slower rise in prices soon if, unfortunately, they don’t come down again?
Peculiarity due to war from March
In any case, Commerzbank has now corrected its inflation forecast downwards and even broken it down by month: It expects 8.2 percent in the euro area for February, so that would not be such a big change compared to January. In March it would then drop more sharply to 6.8 percent. The inflation rate would at least remain above 5 percent until August – but then fell to less than 3 percent in October.
“Inflation is likely to fall this year, mainly because energy prices aren’t rising as quickly as they were last year,” says Commerzbank chief economist Jörg Krämer: “Without energy, however, inflation should remain stubbornly high.”
However, Philip Lane, the ECB’s chief economist, believes that the effects of the ECB’s interest rate hikes will slowly start to appear over the course of the year. In the so-called “Dow Lecture” at the National Institute of Economic and Social Research in London, Lane said that much of the inflationary impact of the ECB’s measures is still in the pipeline: the inflation rate is estimated to be 1.2 percentage points this year as a result of monetary tightening lower than without these steps and around 1.8 percentage points next year.
The ECB economists expect inflation of 3.6 percent for the fourth quarter of this year. Governing Board member Fabio Panetta, on the other hand, who tends to put the brakes on interest rate hikes, said the rate could also fall to less than 3 percent by the end of the year if the energy price surge continues to ease in the coming months.
An intriguing question is likely to be to what extent higher wage settlements in response to high inflation will in turn drive inflation. Recently, for example, the wage demands in Germany for 15 percent, for the railways for 12 percent and in the public sector for 10 percent more wages were noticeably high. Wage demands are not agreements – but the tight situation on the labor market could definitely favor the trade unions’ desire for a “strong gulp from the bottle”.
In any case, ECB executive board member Isabel Schnabel said in an interview published on Friday that wage growth in the euro area had picked up significantly and would be between 4 and 5 percent in the coming years: “That is too high to be compatible with our inflation target of 2 percent , even if we take output growth into account.” Concerns about a wage-price spiral seem to be growing in the ECB.
Coffee and butter are getting cheaper again
At the gas station and when buying heating oil, consumers have recently experienced the somewhat declining inflation – but not yet in the supermarket. In January, compared to December, energy prices had already made a declining contribution to the inflation rate in the euro area, while food prices continued to rise. The increase for the year was 14.1 percent.
The prices at producer level, which usually also have an impact on consumer prices with a delay, are signaling initial hope. They fell by 0.4 percent for agricultural products in December compared to November, and by as much as 1 percent for industrial products in January compared to December. Above all, energy became cheaper.
What does that mean for individual products? “Gas bills for consumers will remain high, but will hardly rise above the level reached at the beginning of 2023,” says Holger Schmieding, chief economist at Bankhaus Berenberg. The situation with food is mixed, for coffee and butter, for example, the prices have fallen again.
Wage pressure will be high this year, with gains of 6 percent in Germany and just over 5 percent in the eurozone, before leveling off at around 4 percent next year. Schmieding says: “In itself, the wage hump is contributing somewhat to inflation this year – but the largely ending of the delivery bottlenecks is partially offsetting this.” However, inflation will not go away anytime soon.