Looking ahead and beyond the statistical noise, the German and European inflation outlook is highly affected by two opposing drivers. Lower-than-expected energy prices due to the warm winter weather could, if they remain at current levels, push down headline inflation faster than recent forecasts suggest. On the other hand, there is still significant pipeline pressure stemming from energy and commodity inflation pass-through. In Germany, selling price expectations, the best proxy for the pass-through of higher energy and commodity prices in recent years, have dropped significantly since last summer and currently stand at levels last seen in the spring of 2020. At the same time, however, selling price expectations in services remain close to historic highs. Combined with expected nominal wage growth of more than 5% year-on-year this year, this means that core inflation will remain stubbornly high.
As long as core inflation remains stubbornly high in the eurozone, the ECB will continue hiking rates and will not consider future rate cuts. A 50bp rate hike at the March meeting has been pre-announced and looks like a done deal. Beyond the March meeting, the ECB seems to be entering a new game in which further rate hikes will not necessarily get the same support within the governing council, as hiking deep into restrictive territory increases the risk of adverse effects on the economy.
We currently expect a compromise: two additional rate hikes by 25bp each in May and June, before pausing the hiking cycle and entering a longer wait-and-see period. Financial markets, which only a couple of weeks ago were still betting on rate cuts at the turn of the year, have now once again turned around and are expecting the ECB to hike by a total of 150bp over the next few months. Not impossible, but clearly a recipe for more bad macro news in 2024. - ING
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