Bob Savage argues that risks of stagflation in the Eurozone are increasing as energy pressures rise, with headline CPI rising due to fuel costs, while core inflation remains contained. He anticipates the European Central Bank (ECB) will remain cautious and monitor second-round effects, and expects that aggressive front-end inflation pricing in the Eurozone and United Kingdom (UK) is likely to be adjusted in a volatile environment.
ECB pricing, CPI, and energy shock
"More national-level assistance for drivers and business will probably follow the International Energy Agency's special briefing for EU finance ministers. The majority of scenarios indicate resilience, and shortages are not as severe as in the developing world. But for certain products, supply may become more important than pricing.
However, core inflation might not rise as fast if families are also pushed to reduce demand, which could eliminate the need for hikes to limit economic activity. For a preliminary assessment of how inflation dynamics are changing, the CPI numbers in the coming week will be crucial.
Over the past two years, core inflation in the Eurozone has outpaced headlines. Headline inflation was the obvious leader during the 2022–2023 energy shock, but because the cycle was different—global demand was rebounding and consumers had significant wage negotiating power, which might not be the case this time—it drove core prices higher.
"Muller, a member of the Governing Council, cautioned that the central bank "may not need completely evident second-round impacts" before acting—a bold assertion, in our opinion, without sufficient facts. Additionally, markets will need to accept that the ECB may battle for unanimity in the near future."
Aside from inflation statistics, we anticipate that in the near future, salary data will be a major factor in policy decisions. This year's collective bargaining rounds were not anticipated to record significant gains because inflation stabilized prior to the fight.
"The process will probably remain unpredictable, but our bias is that aggressive pricing of front-end hikes in the U.K. and Eurozone will come off."
ECB pricing, CPI, and energy shock
"More national-level assistance for drivers and business will probably follow the International Energy Agency's special briefing for EU finance ministers. The majority of scenarios indicate resilience, and shortages are not as severe as in the developing world. But for certain products, supply may become more important than pricing.
However, core inflation might not rise as fast if families are also pushed to reduce demand, which could eliminate the need for hikes to limit economic activity. For a preliminary assessment of how inflation dynamics are changing, the CPI numbers in the coming week will be crucial.
Over the past two years, core inflation in the Eurozone has outpaced headlines. Headline inflation was the obvious leader during the 2022–2023 energy shock, but because the cycle was different—global demand was rebounding and consumers had significant wage negotiating power, which might not be the case this time—it drove core prices higher.
"Muller, a member of the Governing Council, cautioned that the central bank "may not need completely evident second-round impacts" before acting—a bold assertion, in our opinion, without sufficient facts. Additionally, markets will need to accept that the ECB may battle for unanimity in the near future."
Aside from inflation statistics, we anticipate that in the near future, salary data will be a major factor in policy decisions. This year's collective bargaining rounds were not anticipated to record significant gains because inflation stabilized prior to the fight.
"The process will probably remain unpredictable, but our bias is that aggressive pricing of front-end hikes in the U.K. and Eurozone will come off."
