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Inflation is falling less than expected in Europe at the start of the year, Eurostat announced on Wednesday. First driven in 2022 by the increase in energy prices – which are experiencing a lull –, it now maintains its momentum, in particular, because of the continuous increase in food prices: ie underlying inflation. A “worrying factor” for economist Philippe Waechter, and a “fairly new” situation that European economies will have to manage in the spring.
Good news… deceptively. The euro zone’s annual inflation rate continued to decline in February for the fourth consecutive month, to 8.5% over one year, according to figures published by Eurostat on Thursday 2 March. The October 2022 peak (10.6%) seems to be receding, but beware of over-enthusiasm: in reality, inflation actually fell less than expected in February. Experts polled by Factset and Bloomberg were in fact expecting a rate of 8.2% and 8.3% respectively before the publication of European figures. This difference in forecast seems small, but it hides a contrasting reality on the dynamics that inflation is currently experiencing in Europe.
Until then, inflation was driven by the increase in energy prices, the lull in which has been confirmed in recent months: up by a dizzying 41.5% in October, the prices of gas, oil and even electricity only increased by 13.7% in February. But this dynamic is counterbalanced by a major change: the increase in food prices, which has become the driver of current inflation for the first time in the last two years.
“It’s a bad surprise, we didn’t expect this situation at the start of the year,” explains Philippe Waechter, director of economic research at Ostrum Asset Management. “In 2022, we wondered about the price of energy which was driving inflation up. Today, it is slowing down very significantly, but all the other components are taking over, and that is what is worrying. Food prices in particular are rising significantly, and this is a penalizing factor for households.”
The rise in food prices has even jumped in one year: where the increase was 4.2% in February 2022, it was 15% last month in the euro zone.
“We see underlying inflation progressing”
Despite this increase, the peak of food inflation does not seem to have passed yet. It could even take place in the spring in European countries and in France in particular, where manufacturers and supermarkets have just completed their annual negotiations to set the selling prices of foodstuffs.
Manufacturers and the Federation of Commerce and Distribution agree that the increase in the price paid by large retailers to their suppliers should be around 10%… and supermarkets should pass on at least a part of these increases on consumers, without it being known for the moment in what proportion. But the average price of the shopping basket will probably continue to increase over the next few weeks.
“Spring is going to be complicated to manage,” continues the economist. “Month after month, we see underlying inflation progressing, this is a worrying factor. Companies, particularly in goods, diffuse the rise in energy prices in their own prices” as has been seen in the negotiations between industrialists and large retailers in France.
Core inflation – which, unlike inflation, excludes products with volatile prices (such as energy) but includes food products – is an index “more suited to an analysis of inflationary pressures”, according to the ‘Insee. And in addition to the prices of food products, Eurostat also confirms for the past month the increase in the prices of industrial goods – up 6.8% over one year, against 3.1% in February 2022 – and inflation which is accelerates in services – to 4.8%, compared to 2.5% in February 2022.
“There is a relay effect between energy prices and food prices” which is currently taking place, summarizes Philippe Waechter. And the economies of the euro zone react differently to this dynamic: the inflation rate of France – although lower than that of its neighbors – increases for the third consecutive month, to 7.2%, that of the Italy is down (to 9.9%, against 10.7% in January) and that of Germany is up slightly (to 9.3%, against 9.2% in January).
What role for the ECB in the coming months?
Despite the inflationary dynamics of the moment, the German Federal Bank maintains that inflation will fall this year in the country: it even estimated, on Wednesday March 1, that inflation in Germany will be 7% in 2023 – it originally estimated at 7.2% in a previous forecast in December.
The Bundesbank also remained firm on the need to continue raising interest rates in the euro zone. A path that the European Central Bank (ECB) has been following since last July, when it decided to activate this economic lever, for the first time since 2011, in order to fight against inflation. The European banking institution has since continued its monetary tightening policy and plans to do the same in March.
These new inflation figures in the eurozone could still lead the ECB to another interest rate hike beyond next month. “At this stage, it is possible that we will continue on this path”, admitted Thursday March 2 the president of the institution, Christine Lagarde, on the Spanish channel Antena 3, without however advancing on the extent of the increases. possible after the March 16 meeting.
This strategy is not without risk in the medium term for European economies, warns Philippe Waechter: “Inflation does not seem to be falling despite the ECB’s monetary policy. The latter, by raising its rates, does not prevent the effect of integrating energy prices into corporate behavior.”
And the economist concludes: “If the ECB is forced to go further than expected, this risks causing a much more marked slowdown in economic activity, because companies and households will be penalized in their financing. . In these circumstances, inflation could stop but the risk of recession could then also increase.”