The expiry of the lower VAT rate on natural gas and restaurant services and the higher CO2 price in Germany will also prevent a stronger decline in euro area inflation in January. Adjusted for these effects, however, the underlying upward pressure on prices
should continue to ease over the course of the year. This is because cheaper energy will also dampen the rise in prices of non-energy goods and services for some months to come. Core inflation should fall to 2.5% by mid-year.
However, as the year progresses, companies are likely to pass on the recent sharp rise in labor costs to their customers to a greater extent, and core inflation should settle at just below 3%.
Against this backdrop, it would be premature to declare victory over inflation. The ECB is likely to be reluctant to lower its key rates. In our view, market expectations of 150 basis points of cuts by the end of the year are clearly overdone. We expect only 75 basis points of cuts
-Commerzbank
Commenti