Frédérique Carrier, Head of Investment Strategy for RBC Wealth Management in the British Isles and Asia provides her thoughts on European inflation.
While U.S. and European inflation have both decelerated in recent months, the jury is still out for the UK. November inflation was slightly below the October level, at 10.7% y/y vs. 11.1% y/y, but additional progress may be slow to achieve. The British Retail Consortium observed that annual food inflation leapt by close to 1% to 13.3% in December. Wage pressures continue, fostered by widespread strikes. In the spring, the lifting of the energy price caps will likely also mean higher energy bills, even as wholesale natural gas prices come down. RBC expects 2023 inflation to settle at 7.3% by year end, before falling to 2.1% a year later.
The eurozone’s inflation expectations are fading much faster than actual inflation. The latest European Central Bank survey of consumer expectations sees inflation at 5% in a year’s time, down from 5.4% previously. This survey outcome marks the first decline in expectations since May 2022. Even with inflation expectations declining, we think the central bank will still be concerned about inflation running above the 2% target, and a number of ECB members have delivered hawkish statements this week. One of them, Robert Holzmann, stated that “as long as core inflation isn’t peaking, the change in headline inflation won’t make a change in our determination.” Holzmann’s comments were echoed earlier in the week by another hawkish member, Isabel Schnabel, who stated that rates must still rise significantly. Despite these hawkish comments, changes in market expectations have been muted, with the terminal policy rate still hovering around 3.30%. Our view is slightly more conservative as we expect interest rates to peak at 3%.
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