EU Inflation Slowdown Expected To Be Gradual

Inflation in the Eurozone continued to rise in December, with core inflation remaining above the target of 2% due to rising producer prices, despite a minor slowdown in energy costs. Despite reduced energy costs and a little tightening of ECB policy, many expect increased inflation for at least the first half of this year.

Eurozone inflation increased to 5% in December, up from 4.9 percent in November, and was at its highest level since 1985, according to Eurostat. Inflation was 4.1 percent in October, compared to a year ago, when prices were generally declining (minus 0.3 percent ).

The most significant increase was in the cost of electricity, which increased by 26% (from 27.4% in November). Food prices grew by 3.2 percent, compared to 2.2 percent in November.

The cost of non-energy industrial items rose by 2.9 percent in November, compared to 2.4 percent the previous month, and the cost of services increased by 2.4 percent, compared to 2.7 percent the previous month. Inflation would have been 2.6 percent if energy and food were excluded, which is still more than the ECB’s target of 2%.

Inflation in Europe is of a mixed nature. Two nations in the currency bloc, Estonia (12 percent) and Lithuania (12 percent), had double-digit price increases towards the end of the year (10.7 percent ). In nine other countries, inflation has surpassed 5%. In example, the index in Germany dropped from 6% to 5.7 percent (albeit it increased by 0.3 percent on a monthly basis), whereas it swiftly accelerated from 5.5 to 6.7 percent in Spain, from 3.9 to 4.2 percent in Italy, and remained steady in France (3.4 percent ).

As part of its ongoing unconventional monetary policy, the ECB modified parameters of quantitative easing in December: in particular, the watchdog lowered the volume of asset purchases under the anti-crisis Pandemic Emergency Purchase Program, which is expected to be terminated at the end of March next year. In addition, the authority will continue to buy assets as part of its core program (Asset Purchase Programme). In the second quarter of 2022, the monthly volume of buybacks will be increased to €40 billion, and in the third quarter, to €30 billion. From October 2022 onwards, the ECB will continue to buy back assets under the program for €20 billion every month, as it has done previously.


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