Eurozone inflation: Eurostat releases figures

In October, inflation was still 10.6 percent, the highest level since the introduction of the euro. Economists had expected a rate of 10.4 percent for November. However, the ECB is dampening hopes that the peak has been passed.

The main price driver in November is once again energy, which cost 34.9 percent more than in the previous year. However, momentum has slowed (41.5 percent in October). Food increased by 13.6 percent. Core inflation, which excludes volatile energy and food prices, was 5.0 percent, the same as in October, a record level.

Compared to October, prices fell by 0.1 percent. That means: A shopping cart was 0.1 percent cheaper in November than in October, but 10.0 percent more expensive than in November 2021. Comparisons with the previous month allow for a better analysis of the dynamics of price developments. In October, prices were still 1.5 percent above the previous month.

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In a first reaction, the leading euro zone index EuroStoxx 50 and the Dax hardly changed. The euro defended its daily gains of 0.4 percent against the US dollar.

Germany, the largest economy in the currency area, had already presented new price data on Tuesday. Based on the Harmonized Index of Consumer Prices (HICP), the calculation method for the euro area, inflation fell to 11.3 percent in November (from 11.6 in October).

On a CPI basis – the national measure of price developments in Germany – inflation has fallen to 10.0 percent (from 10.4). Price pressure has also eased somewhat in Italy, Spain and the Netherlands. This strengthens the debate as to whether inflation may have peaked in the meantime.

When will inflation peak?

In the euro area, however, the so-called “peak” still seems a long way off, despite the decline in November. Christine Lagarde emphasized on Monday that the summit had not yet been reached. “That would surprise me,” said the President of the European Central Bank (ECB). The top economists at the ECB would currently rather see the risk of inflation increasing. The ECB is targeting a rate of two percent.

As a result, interest rates will be raised again at the next Governing Council meeting on December 15th. In the next few days it should become clear whether the trend is more in the direction of an increase of 50 or at least another 75 basis points. The monetary authorities had chosen this step for the last two increases.

>> Read here: What top economist Olivier Blanchard thinks about the further development of inflation

Interesting in this context: the currency watchdogs, especially Lagarde himself, have repeatedly made it clear that interest rate decisions are based even more closely than usual on the current data situation. The new price data from Wednesday are therefore considered an argument for the more moderate step. Many council members would advocate this, said Fritz Köhler-Geib, the chief economist at KfW.

“But a smaller interest rate hike should not mean that the ECB is already eyeing the end of the interest rate hike cycle,” commented Thomas Gitzel, Chief Economist at VP Bank. There is “still a long way to go.” Commerzbank chief economist Jörg Krämer said, referring to the continued high core inflation: “In the coming year, the underlying price pressure is likely to remain stubbornly high.”

After three rate hikes since July, the key interest rate in the euro area is now 2.0 percent. The interest rate on deposits, which is mainly relevant for the financial system, is 1.5 percent. Banks receive this interest on excess capital that they park at the central bank overnight.

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According to some economists, an increase in the deposit interest rate of more than 2.0 percent would push the central bank into the restrictive area. The prevailing level would therefore slow down the economy. The current level is considered a so-called neutral area in which an economy is neither slowed down nor strengthened. However, the classification of the interest rate ranges is subject to a great deal of uncertainty.

An advance into the restrictive area would no longer be a surprise. ECB Director Isabel Schnabel has already clearly announced this step. This is necessary “to ensure that inflation returns to our medium-term inflation target as quickly as possible and that no second-round effects occur,” said Schnabel last week. Second-round effects mean that higher costs are passed on to consumers, which can then lead to further price increases.

However, some economists and currency watchdogs fear that the ECB’s resolute action could further weaken the already ailing economy. They therefore advocate a softer monetary policy and less momentum in the rate hike cycle.

Advocates of a strict monetary policy, such as Bundesbank President Joachim Nagel, known in technical jargon as “hawks”, point to the double-digit inflation rates and the damaging effects on the economy. The ECB must master this difficult balancing act.

More: Ex-ECB President Trichet worried about high inflation

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