The disinflation of 2023, between hope and uncertainty

The latest ECB survey of professional forecasters (SPF) shows a downward revision of the growth outlook and an upward adjustment of the inflation forecast. For next year, the real question is not about the direction of inflation but about the speed and extent of its decline. Slower than expected progress could convince the ECB of the need for more rate hikes than currently priced by markets, implying a bigger output cost of bringing down inflation. Disinflation could indeed take longer than expected. Over the past two years, a variety of factors have led to an exceptionally elevated but also broad-based inflation. Not all shocks have occurred simultaneously and it often takes time for them to work their way through the system, from the producer to the wholesaler to the retailer. This creates an inertia in the inflation dynamics.

The latest ECB survey of professional forecasters (SPF) offers sobering reading. The growth outlook has been revised downwards -real GDP is expected to decline in the third and fourth quarter of this year and the first quarter of next year- and the inflation forecast has been revised upwards¹. Moreover, despite the significant increases in the ECB policy rates and a worsening of financial conditions -higher sovereign bond yields, a widening of corporate bond spreads, the decline in equity markets, tighter loan conditions² -, uncertainty about the inflation outlook -based on the distribution of forecasts- continues to increase and the percentage of survey participants who expect inflation above 5% next year has jumped (chart 1).