When will inflation fall?

Interest rate development remains uncertain

Both the ECB and the US Fed have reduced the pace of interest rate hikes since the beginning of the year. This was only partly due to progress in the fight against inflation. Although the rate of inflation has fallen significantly, this was largely due to energy prices, which hardly react to interest rates. In contrast, there has been little (USA) or at best initial (EZ) progress in core inflation so far.

However, the environment speaks for easing inflationary pressure. Energy prices, which had risen sharply especially in the Eurozone, have already fallen significantly, which should also have a positive effect on inflation in other areas. Globally weak industrial production argues for only moderate price increases for goods. Where price dynamics are still strong is in services. Here, catch-up effects after the pandemic are still likely to have an impact, but these should subside.

However, things are not quite that simple. Inflation and, at least in the USA, the economy have been more robust than had been expected in an environment that has been difficult for some time. At the same time, previous interest rate hikes have not yet taken full effect. The effect is delayed and thus there is considerable uncertainty about how strong it will ultimately turn out to be. Thus, interest rate developments remain uncertain in the second half of the year. As always, you can see our assessment of key interest rates and the bond markets for the Eurozone and the USA in two chapters.

Things are not quite that simple would have been a good headline for the special topic in which we look at the energy transition and its impact on electricity prices. Instead, the chapter is entitled Many goals are not yet a plan, which fits even better.

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