Next week (June 1), a first flash estimate of Eurozone inflation for May will be published. In April, headline inflation broadly stabilized at 7.0% y/y. Currently, core inflation and food prices are the main drivers of inflation. However, for the first time in a long time, both components showed a slight decline in momentum in April. We expect this slight downward trend to continue in the coming months.
Against this background, we expect a further slight decline in inflation in May. We expect all major components (energy, food and core inflation) to contribute to this decline. The decline in food prices should continue after prices for agricultural commodities have been declining or been stable for some time and because energy prices are also already at a significantly low level. In the case of core inflation, the price dynamics for goods in particular should continue to fall rapidly, after a clear decline in producer prices has already been observed for some time. This decline reflects the sustained easing of the situation in global supply chains, where there is now a destocking that is putting pressure on the price level. Accordingly, industrial sentiment in the Eurozone has recently weakened further. In contrast, we expect only a slow decline in the momentum of services prices. The services sector continues to benefit from catch-up effects after the end of the pandemic. However, we expect the situation for service providers to gradually normalize in the course of the second half of the year.
In the short term, therefore, the development of services inflation will remain in focus from a monetary policy perspective. For the situation to ease, a stable and sustained decline in services inflation in the Eurozone in the coming months would be important. Wage developments will play an important role here. Now that the energy price dynamic is already negative in some countries and the price dynamic for food has also begun to decline, the pressure in upcoming wage negotiations should gradually decrease. This should reduce the risk of further sharp increases in wage demands. As the catch-up effects of the pandemic fade, the pressure on the labor market for service providers should also gradually ease and have an additional dampening effect on future wage demands. For the current year, we expect inflation to fall to 5.6% and in 2024 to drop significantly to 2.7%. Only in 2025 do we forecast inflation to fall to the ECB's target of 2%.
This document is intended as an additional information source, aimed towards our customers. It is based on the best resources available to the authors at press time. The information and data sources utilised are deemed reliable, however, Erste Bank Sparkassen (CR) and affiliates do not take any responsibility for accuracy nor completeness of the information contained herein. This document is neither an offer nor an invitation to buy or sell any securities.
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