Inflation remains high but, judging by the latest figures published for the Eurozone, it is much less so and, at first glance, it is no longer very far from the 2% target. Of course, there is still some way to go; the uncertainty relates in particular to how fast the “last mile” of disinflation will be covered, before reaching the 2% target. It is to be expected to be slow rather than quick, partly because favorable base effects on energy prices will play less.
However, the latest figures have been encouraging, as inflation has taken another important step down according to the flash estimate for November. Headline inflation fell to 2.4% year-on-year, its lowest pace since July 2021. The decline is significant both for the headline and the core print. It concerns the vast majority of member states. And there is less dispersion between them: five countries have an inflation rate of less than 2% and the highest inflation rate is “only” 7% (in Slovakia).
Of course, it is headline inflation that is really close to the 2% target. Core inflation is only slightly below 4%, therefore still quite far from the target and its decline is slower than that of headline inflation. Since its peak in March 2023 (at almost 6%), core inflation has fallen by about 2 percentage points when headline inflation has fallen by almost 5 points. But, just as the surge in energy and commodity prices had spread to the rest of consumer prices in 2021 and 2022, their decline is also beginning to spread and drive core inflation down.
These disinflationary supply-side pressures should continue to grow, while demand-side inflationary pressures should ease. In 2024, wages are indeed expected to slow down in the wake of inflation and corporate pricing power is expected to become (again) less important as the demand environment is less favorable. That is why a return of headline and core inflation close to the 2% target, by the end of next year, seems quite likely to us and less uncertain than a few months ago.
As for the outlook beyond, and the question of setting inflation on a new regime, slightly above 2% instead of slightly below 2% as in the decade 2010, this will be the focus of a future EcoTVweek!
