![]() A lot depends on the strength of the economy in the months ahead, adding uncertainty for the ECB. Still, if the labour market remains as tight as it is now and the economy bounces back a bit in early 2024, there is a risk that higher energy input costs would also put core inflation further above 2%. Our expectations are that core inflation will slow significantly from the 5.3% August reading towards the end of the year. For services, weaker demand is also contributing to slowing inflation despite higher wage costs, according to the September PMI. And as new orders are weakening, deflation for non-energy industrial goods is realistic towards the end of the year. A lot of drivers of core inflation are at this point still disinflationary, with manufacturing businesses still indicating that input costs are falling despite higher wages and energy prices. Indeed, the big question is whether the higher oil price will once again result in broad-based second-round effects like we saw last year. At the same time, higher oil prices would probably further dent consumer confidence and spending, thereby contributing to the current disinflationary trend due to weaker demand. Plus, a smaller decline in energy prices has materialised this year compared to expectations (which impacts next year’s base effects).Īssuming oil prices stay at $95/bbl for all of 2024, however, the headline figure would rise by 0.3ppt next year, with a peak of the energy price contribution of 1ppt in the second quarter. ![]() Given that our expectations for oil prices do include a drop in the first half of 2024 again, the effect on our own forecast is rather moderate. This could result in a slower decline of inflation to 2%. How do current oil prices change our inflation forecast?ĭespite this not being the 1970s, expectations of further disinflation will be impacted by higher oil prices. With inflation currently trending down and wage growth stabilising above 4%, real wage growth is set to soon turn positive again, but we wouldn’t expect it to erase the losses from the past two years.Īt the same time, it is important to note that government support and employment growth have limited disposable income losses quite substantially. ![]() This makes the chances of a prolonged second spike in inflation much smaller. The current surge in inflation is different in that real wage growth turned negative quickly, which has slowed consumer demand drastically. Indeed, the countries that experienced higher real wage growth for the period also experienced the highest inflation over this period (see chart below). The first was in 1974, when headline inflation was close to 14% the second in 1977 with headline inflation above 10%, and then again in late 1979 and early 1980 with headline inflation back at double-digit levels.īack then, real wage growth remained positive even during the spikes of the oil crises, which allowed inflation to remain above 7% for more than a decade (1972-84). In the eurozone, there were three peak periods for inflation in the 1970s. However, we also admitted that in the late 1970s, the second energy crisis was a main driver for the second inflation wave in many countries. ![]() Is this the second wave of inflation that we thought would never come?Ī few weeks ago, we argued that the current inflation situation is not the same as the 1970s and that a second inflation wave looked highly unlikely.
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