Consumer prices in the euro area rose 4.9% year-on-year in November, surpassing the median estimate of 4.5% and above all other estimates. The core indicator, which excludes volatile items such as food and energy, also reached a record. The record inflation outlook, intermingled with the uncertainty factors that increase the risks of economic recovery, points to a significant policy-making challenge ahead of the European Central Bank's December meeting, when it will decide the future of monetary incentives.
The increase in energy costs and supply constraints stand out as the main determinants of inflation. It is seen that they were also effective in the jump that took place this month. On the other hand; There are prominent findings that inflation may be permanent and that upward price pressures may be higher than previously thought. This indicates that the risks to the current outlook are on the upside. A timeframe before next year for the ECB's 2% inflation target anchor to form does not seem very likely. Price pressures, on the other hand, are at moderate levels compared to the US inflation, which is still pushing the Fed.
Despite this, it is possible for the ECB to receive some updates on inflation on a country basis. Inflation in Germany has reached 6%, the fastest level since the early 1990s. In Spain, data also point to the highest levels in nearly 30 years with 5.6%. On the other hand; Two different opinions that stand out are that inflation may remain well above the target for a long time, or that bond purchases should not be rushed to stop on the verge of the prediction that price pressures will ease significantly.
Eurozone price indicators… Source: Bloomberg, ECB, Eurostat
In this context, forward-looking projections regarding growth and inflation will shed light on the December 16 meeting, where the end of the pandemic bond purchase plan will likely be announced. At the September meeting, the forecasts of the ECB for the future were in the direction of an inflation that would decline towards the 1.5% band in 2023. It is rather unclear how this will change after the emergence of the omicron coronavirus variant, potentially more contagious than previously known variants. Because the risks of new restrictions on the economy have also increased. The cases that have increased again in recent weeks have caused some restriction measures to come to the fore at the threshold of the new variant in Europe, where there has already been increased concern. While the Netherlands and Germany impose new restrictions, there are also measures in countries such as Austria and Slovakia. This is important in this respect; such measures may increase the slowdown in activity on the economy, especially in terms of production and employment, and supply chain bottlenecks may fuel the slowdown and concurrent inflation uncertainty.
At this point, the issues we will be interested in, rather than ending the PEPP, will be how the regular asset purchases and interest rates will develop. In general, the ECB administration, especially Lagarde, thinks that inflation is due to one-off temporary factors arising from the effects of energy and the pandemic economic crisis. On the other hand, warnings by the Bank's management that it may take longer for price pressures to subside leave it possible for more significant adjustments to be made in monetary policy.
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