European Central Bank: What do core inflation pressures mean for the rate path? – Commerzbank

Renewed interest rate increases and upward revisions to European Central Bank forecasts may be needed as energy costs feed through to broader Euro area inflation, according to analysis by Commerzbank’s Dr. Vincent Stamer. He notes that elevated energy costs are already lifting goods and services prices. The bank’s Quant Model points to headline inflation of around 4% in the coming months, with core inflation moving above 3% over the next year.

Could energy-driven core inflation prompt further ECB rate increases?

"Core inflation in the euro area is currently rising only slowly. However, a closer look at the inflation details shows that high energy prices are already pushing up the prices of goods and services. Next year, this indirect effect is likely to intensify noticeably, causing the core rate to rise further."

"Our Quant Model forecasts a gradual rise in the core rate to over 3% for the next twelve months. In this case, the ECB would have to revise its forecasts upward again and is likely to raise key interest rates once more."

"As in recent months, the model – using data as of October 16 – forecasts an inflation rate of just under 4% for the coming months. Inflation is not expected to decline again until spring, due to base effects and lower oil prices."

"According to our forecasts, core inflation is expected to rise from its current level of 2.5% to over 3% by the fall of next year. This is because companies have been paying high energy prices for more than half a year and are now increasingly passing these costs on."

"Based on our current forecasts, the ECB is likely to raise its expectations again in December. This supports our expectation of an ECB interest rate hike in December."

(An Artificial Intelligence tool assisted in preparing this article, which was reviewed by an editor. Find out more.)