Research

Menu

Back

Choose Language

November 30, 2021

News

Newsflash: Eurozone inflation hits a new all-time high

 Price pressures continued to intensify in the Eurozone through November, adding to the already-complicated stew of factors that the ECB must consider when calibrating monetary policy.

Data released Tuesday showed that Eurozone inflation hit 4.9% year-on-year (yoy) in November, up from October’s 4.1% and the highest level since the formation of the currency union in 1999. In Germany, HICP inflation hit a 29-year high of 6%, in Spain it reached 5.6%, also a 29-year high, while in France, it reached 3.4%, the highest reading since 2008.

Much of the inflation we are seeing on the continent can be attributed to elevated energy costs which, according to Eurostat, surged by 27.4% yoy in November due to a perfect storm of factors which we outlined in another piece back in October. However, with that said, even the core reading that strips out energy and other potentially volatile components such as alcohol, food and tobacco, rose to 2.6% yoy, up from October’s 2%. Services inflation rose from 2.1% to 2.7%.

This broadening out of inflation pressures further challenges the ECB’s notion that inflation will prove transitory and leaves some questioning its stance as one of the most dovish central banks coming out of the crisis, as others embark on tightening cycles.

Under normal circumstance, these red-hot inflation prints would bolster the case for tighter policy, but the current environment is far from normal… The Eurozone recovery is still fragile while Coronavirus cases are once again on the rise, compelling governments to re-impose restrictions, which in turn could stall economic momentum – hardly optimal timing to begin contemplating policy tightening. This is not to mention the discovery of the Omicron variant which is currently subject to scientific analysis in order to understand the potential threat that it poses. To take a glass-half-full position, experts argue that societies are better equipped to deal with the virus now compared with March 2020, but we cannot say anything with certainty until studies of the new variant are complete (especially with regard to vaccine efficacy).

While the Eurozone economy found its feet, the ECB adopted a somewhat laissez-faire approach to price pressures, preferring to let inflation come down on its own accord, once energy costs cool off, supply chain dislocations ease up and other unfavourable base effects fade away (i.e. distortions caused by the German VAT hike will drop out of the numbers in January). Its latest forecasts, published in September, predict that inflation will fall to 1.5% in 2023 – below its 2% target.

However, there are risks to the “transitory” base case. Firstly, the new wave of Covid (if it leads to further restrictions) could potentially intensify supply chain dislocations and shortages, adding to goods inflation. Further, while muted for now, second-round effects may still come into play. Though the ECB’s indicator for negotiated wage growth hit an all-time low last quarter, if evidence from the US is anything to go by, wage inflation could still kick in. There, wage growth accelerated 4.9% yoy in October. Indeed, the ECB’s very own staff union, IPSO, has hit out at a proposed general salary increase of 1.3%, effective January 2022, saying that it is insufficient to protect the purchasing power of the central bank’s employees.

The real danger that the ECB contends with is that inflation becomes ingrained before temporary drivers subside. It cannot fall too far behind the curve or else inflation (and inflation expectations) may become unanchored, while policy needs to remain accommodative enough so as not to derail the economy recovery. Achieving the right balance between these two risks will be very much dependent on delicate communication. Already this week, we have seen a handful of officials double-down on efforts to reassure citizens that they are facing a once-in-a-generation burst of inflation that won’t endure, driven by energy costs and a series of one-off factors.

With regard to future policy, ECB Vice President Luis de Guindos said last week that the central bank plans to end its Pandemic Emergency Purchase Program in March. However, the market now eagerly awaits the ECB’s next monetary policy committee on 16th December for more information on the future of quantitative easing under the standard Asset Purchase Program and for any clues about when we might expect the ECB to raise its deposit rate from an all-time low of -0.5%. The ECB will also update its economic projections and the market expects that inflation estimates will be revised upwards, reflecting that fact that “transitory” narrative, while plausible, is clearly longer-lasting than initially expected.

Disclaimer

All financial data and/or economic information released by this Publication (the “Publication”); (the “Data” or the “Financial data and/or economic information”), are provided for information purposes only, without warranty of any kind, including without limitation the warranties of merchantability, fitness for a particular purpose or warranties and non-infringement of any patent, intellectual property or proprietary rights of any party, and are not intended for trading purposes. Banque Internationale à Luxembourg SA (the “Bank”) does not guarantee expressly or impliedly, the sequence, accuracy, adequacy, legality, completeness, reliability, usefulness or timeless of any Data. All Financial data and/or economic information provided may be delayed or may contain errors or be incomplete. This disclaimer applies to both isolated and aggregate uses of the Data. All Data is provided on an “as is” basis. None of the Financial data and/or economic information contained on this Publication constitutes a solicitation, offer, opinion, or recommendation, a guarantee of results, nor a solicitation by the Bank of an offer to buy or sell any security, products and services mentioned into it or to make investments. Moreover, none of the Financial data and/or economic information contained on this Publication provides legal, tax accounting, financial or investment advice or services regarding the profitability or suitability of any security or investment. This Publication has not been prepared with the aim to take an investor’s particular investment objectives, financial position or needs into account. It is up to the investor himself to consider whether the Data contained herein this Publication is appropriate to his needs, financial position and objectives or to seek professional independent advice before making an investment decision based upon the Data. No investment decision whatsoever may result from solely reading this document. In order to read and understand the Financial data and/or economic information included in this document, you will need to have knowledge and experience of financial markets. If this is not the case, please contact your relationship manager. This Publication is prepared by the Bank and is based on data available to the public and upon information from sources believed to be reliable and accurate, taken from stock exchanges and third parties. The Bank, including its parent,- subsidiary or affiliate entities, agents, directors, officers, employees, representatives or suppliers, shall not, directly or indirectly, be liable, in any way, for any: inaccuracies or errors in or omissions from the Financial data and/or economic information, including but not limited to financial data regardless of the cause of such or for any investment decision made, action taken, or action not taken of whatever nature in reliance upon any Data provided herein, nor for any loss or damage, direct or indirect, special or consequential, arising from any use of this Publication or of its content. This Publication is only valid at the moment of its editing, unless otherwise specified. All Financial data and/or economic information contained herein can also quickly become out-of- date. All Data is subject to change without notice and may not be incorporated in any new version of this Publication. The Bank has no obligation to update this Publication upon the availability of new data, the occurrence of new events and/or other evolutions. Before making an investment decision, the investor must read carefully the terms and conditions of the documentation relating to the specific products or services. Past performance is no guarantee of future performance. Products or services described in this Publication may not be available in all countries and may be subject to restrictions in some persons or in some countries. No part of this Publication may be reproduced, distributed, modified, linked to or used for any public or commercial purpose without the prior written consent of the Bank. In any case, all Financial data and/or economic information provided on this Publication are not intended for use by, or distribution to, any person or entity in any jurisdiction or country where such use or distribution would be contrary to law and/or regulation. If you have obtained this Publication from a source other than the Bank website, be aware that electronic documentation can be altered subsequent to original distribution.

As economic conditions are subject to change, the information and opinions presented in this outlook are current only as of the date indicated in the matrix or the publication date. This publication is based on data available to the public and upon information that is considered as reliable. Even if particular attention has been paid to its content, no guarantee, warranty or representation is given to the accuracy or completeness thereof. Banque Internationale à Luxembourg cannot be held liable or responsible with respect to the information expressed herein. This document has been prepared only for information purposes and does not constitute an offer or invitation to make investments. It is up to investors themselves to consider whether the information contained herein is appropriate to their needs and objectives or to seek advice before making an investment decision based upon this information. Banque Internationale à Luxembourg accepts no liability whatsoever for any investment decisions of whatever nature by the user of this publication, which are in any way based on this publication, nor for any loss or damage arising from any use of this publication or its content. This publication, prepared by Banque Internationale à Luxembourg (BIL), may not be copied or duplicated in any form whatsoever or redistributed without the prior written consent of BIL 69, route d’Esch ı L-2953 Luxembourg ı RCS Luxembourg B-6307 ı Tel. +352 4590 6699 ı www.bil.com.

Read more


More

September 30, 2024

BILBoard

BILBoard October 2024 – Harvest season

Executive Summary As autumn approached, we saw increased volatility on capital markets. Bad days were swiftly followed by significant rallies, and like the leaves currently...

September 23, 2024

Weekly insight

Weekly Investment Insights

Last week, we had the news that the iconic brand Tupperware had filed for bankruptcy. So dominant was the company in its heyday that when...

September 9, 2024

News

What lies behind recent trends in the...

At 6.4%, the Eurozone unemployment rate currently sits at its all-time low, but the picture varies from country to country. Labour market trends will influence...

August 28, 2024

BILBoard

BILBoard September 2024 – The stars a...

August brought sky gazers a rare blue supermoon; the next won’t occur until 2037. It also brought what will hopefully prove to be a once-in-a-blue-moon...

August 14, 2024

News

Taking stock on the recent market sel...

Following the market meltdown that occurred at the beginning of August, we wanted to provide a recap of events for our clients and outline how...

All articles