Inflation in the eurozone slowed down for the first time in a year and a half

Inflation in the Eurozone slowed to 10% in November after a record 10.7% in October, according to preliminary data from Eurostat. This was the first slowdown in price growth since June 2021. At that time, the agency estimated the indicator at 1.9%. From June to December last year, inflation continuously accelerated by an average of 0.5 percentage points. every month and reached 5% by the end of 2021. The dynamics became even sharper after the introduction of anti-Russian sanctions and the rise in the cost of energy resources. In March 2022, inflation reached 7.4% after 5.9% in February.

The strongest slowdown in inflation so far has been recorded in the Netherlands, where the dynamics dropped by 5.6 percentage points: from 16.8% in October to 11.2% in November. Also among the leaders were Luxembourg (1.5 p.p. – from 8.8% in October to 7.3% in November), Estonia (1.1 p.p. – from 22.5% to 21.4 %), Spain (0.7 p.p. – from 7.3% to 6.6%) and Lithuania (0.7 p.p. – from 22.1% to 21.4%). In Germany, Europe’s largest economy, annual inflation slowed by 0.3 percentage points. compared to the previous month – from 11.6% to 11.3%. In France, inflation has remained at 7.1% since October.

The most significant acceleration is observed in Finland (plus 0.6 p.p. – from 8.4% to 9%), Slovakia (0.6 p.p. – from 14.5% to 15.1%) and Slovenia ( 0.5 pp – from 10.3% to 10.8%).

The highest rates of inflation remain in Lithuania, Latvia and Estonia – in these three countries it exceeds 21%.

The current slowdown in consumer price growth is mainly due to a general drop in the cost of energy products in October and November, said Dmitry Kulikov, director of ACRA’s sovereign and regional ratings group. The energy market continues to be the main source of inflationary risks for Europe: characteristically, the rise in energy prices over the past 70 years preceded major recessions, he recalled. For example, shortly before the global financial crisis of 2008-2009, Light Sweet oil rose to $147 per barrel, the expert continued.

According to Eurostat’s estimates, energy prices continue to rise the most – annual inflation in this sector is expected to remain at 34.9% in November. However, this remains a significant slowdown from 41.5% in October.

Inflation in the service sector also slowed down – 4.2% against 4.3% last month. Price growth was demonstrated by food products, tobacco and alcohol – 13.6% compared to 13.1% in October. Price growth in non-energy industrial products stalled at 6.1% from last month.

The current dynamics is more accurately displayed not by the values ​​​​of price growth for the year, but by inflation month by month, believes Alexander Knobel, director of the Institute of International Economics and Finance of the Higher Aviation Trade Institute of the Ministry of Economic Development.

According to Eurostat’s preliminary estimates, the consumer price index in November fell by 0.1% versus October, mainly due to a 1.9% drop in energy prices. All other goods and services, with the exception of energy resources, in the Eurozone rose in price by 0.2% in November, which, however, is significantly lower than the price growth rate in October (0.8% per month).

Inflation is returning to normal levels of 2-3% a year, Knobel said. Two key factors, in his opinion, are the increase in the ECB interest rate and the entry of the European economy into recession. But the dynamics of inflation in Europe in the short term will continue to depend mainly on the situation in the energy markets, Knobel said.

A pause in the inflation trend is weakly related to the actions of the regulator, disagreed with the head of the “Macroeconomic Analysis and Financial Markets” CSR Natalia Safina. As a result of the ECB rate hike, the current level of the deposit rate reached 1.5%, and the credit rate – 2%, which is completely insufficient to stop a strong inflationary trend, she points out. A slight decrease in inflation for the first time in a year and a half – hardly speaks of a normalization of the trend, doubts Safina. Nevertheless, the high base of 2022 in 2023 will act as a factor holding back further nominal price growth in annual terms, the expert noted. However, this does not mean that the influence of already existing anomalous levels will weaken, she points out.

In many respects, the situation with inflation in the United States is similar to the European situation, where normalization is also possible in the coming months, Knobel notes.