For Europe, The Outlook Is Even Bleaker – EU CPI Can Reach 10.7%

Inflation in the eurozone is expected to have reached a new record high of 10.7% in October.

The outlook

In September inflation amounted to 9.9%.

The Baltic countries remain the hardest hit, with annual inflation above 20%. Estonia leads in comparison with estimates of 22.4%.

This is mainly because they are particularly vulnerable to fluctuations in the energy markets. According to Eurostat, the price of natural gas for households increased by 154% and 110% respectively in Estonia and Lithuania between the first half of 2021 and the first half of this year.

Meanwhile, France maintained its position as the country least affected by the crisis, although annual inflation in October was 7.1%.

Forecast

Euro inflation is expected to increase to 10.8% y/y from 10.6% y/y, but core inflation will remain stable at 5.0% y/y.

These relative price shocks reflect the scale and extent of the energy, pandemic and war shocks. In such circumstances, standard measures of core inflation at the time may not accurately reflect the persistent component of inflation, while forward-looking wage growth rates may play a useful additional role in determining the medium-term inflation dynamics.Long-term inflation expectations now seem well anchored at the 2% target.

Inflation and interest rates

The European Central Bank, tasked with keeping eurozone inflation close to 2%, broke with more than a decade of negative interest rates this summer in an effort to contain price increases.

Central banks use their interest rates to make money more expensive or cheaper to increase or reduce spending as they directly affect the interest rates offered to households and businesses by commercial banks.

Central banks, having more and more signs of easing price pressure in the medium term, are increasingly considering slowing down the pace of rate hikes. Minutes from the last Fed meeting and Fed speeches suggest that the majority in the Fed is in favor of lowering the scale of interest rate hikes to 50 bp from 75 bp. However, before the meeting on December 14, we have yet another report on employment and inflation, which will be crucial for the scale of the rate hike.

The ECB may also move to 50 bp, but much depends on how next week's November inflation will turn out. Another high printout would probably trigger a 75 bp hike at the meeting on December 15, but the specialists' baseline scenario assumes a 50 bp hike.

Economic growth

The eurozone economy is believed to have grown in the third quarter, but only by 0.2% from the previous quarter, according to Eurostat's preliminary data, also released on Monday.

In the second quarter, the area of 19 countries increased by 0.8%.

At least three countries are projected to contract quarterly. Growth in Latvia contracted by 1.7%, while Belgium and Austria grew by 0.1%.

According to forecast of the head of the International Monetary Fund (IMF) offered her own grim prediction that half of the countries in the eurozone could enter into recession in the months to come. Europe's economy is projected to be badly hit by the energy crisis triggered by Russia's war in Ukraine. The IMF estimated the eurozone to expand by 3.1% in 2022 but just by a meagre 0.5% in 2023. Next year, Germany and Italy are projected to post -0.3% and -0.2% rates, respectively.

Source: IMF, investing.com