Next week (May 31), a first flash estimate of Eurozone inflation in May will be published.
In April, inflation stabilized at its historical high of 7.4% y/y. Although upward pressure from energy prices has eased, price pressures from core inflation have increased significantly to 3.5% y/y.
Based on current indications, we expect inflation to stabilize at a high level in May. Upward pressure from energy prices may ease further. However, in this context, the acute capacity problems of French nuclear power plants pose a short-term upside risk to Euro Area electricity and energy prices. By contrast, core inflation could pick up again slightly in May.
Due to weakening base effects for energy prices, we expect a gradual decline in the inflation rate in the second half of the year. In this context, however, the current upward trend in core inflation represents a risk factor. In our view, two factors are key to the outlook for core inflation: producer prices on one hand and wage developments on the other. Due to the cooling of leading economic indicators at the global level, we expect producer prices to lose momentum with a time lag in the coming months. This should have a dampening effect on core inflation with a further time lag. By contrast, we expect upward wage pressure on core inflation to increase, due to the necessary catch-up effects from strong wage increases to compensate for real wage losses in recent quarters.
In the short term, these two factors continue to pose upside risks to the outlook for core inflation. If these risks materialize, we believe this could lead to increased nervousness in the markets. We currently expect a gradual decline in the monthly core inflation rate starting in the summer. For 2022 as a whole, we expect an average inflation rate of 6.4%. As we do not expect any further significant increases in energy prices, we forecast a significant drop in inflation to 2.4% in 2023.
Source: FXStreet – Erste Bank Research Team