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Eurozone: Inflation in the testing ground for the ECB

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Consumer prices in the Eurozone continued to rise from the previous month, increasing by 5% in December; gem November data beat the market expectation of 4.9%, as well as 4.8%, which showed partial softening. Core inflation, which removes variable components such as food and energy, came in at 2.6%, matching the November reading. Inflation, as it stands, marks a testing level for ECB officials, who see the current rise as temporary and postpone tightening expectations.

 

Apparently; supply chain disruptions continue to have inflationary effects and pose challenges for the ECB policy space. Increasing energy costs cause a general spillover effect, and both production costs and end consumer prices increase at this point. High transportation costs and food and commodity prices are problematic in this regard. The view on a large scale is that inflation in the Eurozone is near its peak and will normalize in the coming period. Periodicity and supply openings can contribute to this. Energy, on the other hand, continues to be a problem despite the partial decline in prices in December. Gas prices rose again after Russia halted deliveries to western Europe and threatened to squeeze consumers and force companies in energy-dependent sectors to cut production. The conflict with the US and NATO in the Ukraine issue can determine the course of this crisis, it should be watched. The Omicron variant also blurs the outlook, and it is feared that it will cause inflation by causing both an economic slowdown and a production bottleneck. We expect the course to be still volatile.

 

Lagarde said last month that inflation will remain high in the near term before settling below the 2% target in 2022. She said a rate hike would not be the right response to the current price hike, with some of its effects only being felt later, when pressures have already eased. Although the ECB is gradually withdrawing its emergency crisis stimulus measures, it is not tightening as aggressively as the Fed and is not expected to raise rates in 2022. We think that a reliable decline in inflation may be due to the easing of energy pressures and the reduction of supply bottlenecks. Regarding convergence to the 2% inflation target in the medium term, our opinion for the ECB is that the slowdown effect due to the Omicron variant across the continent will be taken into account by moving forward gradually.

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