Eurozone inflation comes down but upside risks to the outlook remain

Eurozone: Headline inflation falls again, but not the core rate

Eurozone inflation dropped to 8.5% in January, down from 9.2% in December. The breakdown of the components shows that the main reason for the decline was another drop in energy price inflation, which fell from 25.5% in December to 17.2% in January, reaching its lowest level since August 2021. Working in the other direction, the inflation rate of food, alcohol and tobacco increased, rising from 13.8% to 14.1%. Core inflation (excluding food and energy) stabilised at 5.2%, which was the combined result of a jump in the inflation rate of non-energy industrial goods (from 6.4% to 6.9%) and a decline in services inflation (from 4.4% to 4.2%). Although a further breakdown for the eurozone aggregate is not available, data from a number of individual countries suggest that the rise in the inflation rate of industrial goods is partly due to shifts in discount sales of clothing and shoes, which had a temporary upward effect in January. The decline in services inflation seems to be partly be due a drop in the volatile component package holidays. Looking ahead, we expect energy inflation to decline further in the coming months, which should reduce the headline inflation rate. Core inflation should be more sticky though. Indeed, it seems that past rises in energy prices could still be passed on to consumers over the next couple of months, while wage growth is expected to accelerate in the first half of this year, which should keep services sector inflation elevated. Having said that, core inflation should decline noticeably from around the middle of the year onwards, as we expect GDP to contract during most of this year, which should also result in deteriorating labour market conditions and a slowdown in wage growth in the second half of the year. This risks to our inflation forecasts are tilted to the upside. (Aline Schuiling)

The Netherlands: Inflation forecasts raised after January HICP publication 

According to the first estimate by the Dutch statistics bureau (CBS), Dutch inflation declined to 8.4% in January, from 11% in December. This decline was mainly driven by the government's price ceiling on energy prices, which reduced energy inflation to roughly 0% in January, down from 30% in December. Also, industrial goods price inflation declined to 8% compared to 8.7% in December. Upward pressures were caused by food price inflation which increased by 0.5 percentage points to 14.5%, and the inflation rate of services which increased to 6.3% from 5.8% in the previous month. We have raised our annual average inflation forecasts (HICP) to 4.6% in 2023 and 4.1% in 2024. Two opposing factors will affect inflation this year. On the one hand, the price ceiling on household energy that was installed by the Dutch government from the start of 2023 puts downwards pressure on energy prices in inflation. This was already visible in January. On the other hand, we see that inflationary pressures from energy prices (second-round effects) are being passed on to goods, services and food prices. We expect that price pressures from industrial goods will decline the coming months, while the pressures for food and services are stickier and will continue further into 2023; particularly taking into account product specific effects causing higher food prices. In the January estimate core inflation – the measure without volatile energy and food prices – stabilised at 7.1%. We expect that core inflation will stay on average largely above the ECB 2% target in 2023. (Jan-Paul van de Kerke, Aggie van Huisseling)