Inflation will fall from June, but will still peak until March

The great paradox of the Covid pandemic is that exceptionality has become a constant. Extraordinary events such as “there is more volatility in the inflation forecasts of institutions and analysts than in the expectations reflected in the market”, according to Marian Fernández, head of macroeconomics at Andbank Spain. The expert refers to the estimate of 3.2% for the CPI in the euro area in 2022 that the European Central Bank (ECB) updated this Thursday, December 16, above the forecast published by the European Commission in mid-November. 2.3%, also the average of the consensus of economists and experts gathered by Bloomberg, which stood at 2.5% this Friday, and far from the market value, with the reference rates of the debt remaining close from the 2021 average at the end of the week – in the case of Spain around 0.35% and in Germany at -0.4% – and with medium-term inflation expectations undeterred, at 1 85%, below the ECB’s own target, 2%.

The unexpected forecast of the community body reflects different intentions and readings that will mark 2022. The most intuitive intention, that the institution that manages the monetary policy of the eurozone wants to give itself room to execute its stimulus withdrawal plan with total flexibility, given the multiple uncertainties that threaten economic recovery, and that does not hesitate to admit, as they are, mainly: the blows of the coronavirus despite mass vaccination, the high (extremely high) cost of energy and bottlenecks in world trade due to the imbalance between the supply – with problems to resume around the world and mainly in China – and the demand – contained in the confinements and that has exploded without remedy in recent months, also supported by the accumulated savings in periods of inactivity and by the own fiscal and monetary stimuli.

On the other hand, the most illuminating reading regarding the forecast of 3.2% for the CPI in the next year of the ECB is that Covid, energy and bottlenecks, which, in addition to being the main uncertainties for the recovery at the moment, have caused The latest inflation peaks in the euro area and around the world will continue to be very present at the start of 2022.

According to the ECB’s estimate, energy, which has been contributing two-thirds of the advances in the general CPI -in November the historical maximum of 4.9% year-on-year was registered in the euro area- and which is irretrievably transferred to the rest of the components of the baskets prices, will continue to push until at least the second half of 2022.

To begin with, the forecast for the year-on-year evolution for December, which is included in the Bloomberg consensus for the euro area, remains at 4.5% and goes up to 5% for analysis firms such as Oxford Economics.

This Friday, the Bank of Spain raised its inflation forecast in 2022 to 3.7% for our country, “which probably means it sees high inflation during the beginning of 2022 and then falling sharply,” says Ángel Talavera, from Oxford Economics. In the projection, the institution expects that about 2 points will continue to be provided by energy throughout the year.

Until June

It was precisely from June 2021 that the CPI began to accelerate above 2%, and that coincidence makes the base effect itself sufficient to predict a fall in the rate of increase of the indicator that measures prices.

Although what is really important to judge if the inflation problem goes from being more or less temporary to becoming a true hyperinflation crisis like the one of the 70s and 80s of the last century is that the cost of energy falls, and it goes to be deflationary, and world trade bottlenecks widen, as most experts consulted by the Economist considers that it will occur in the second half of 2022.

“Nobody can rule out anything at the moment, and in particular with regard to the evolution of energy prices taking into account the enormous uncertainties that exist, but I would say that it is highly unlikely that energy prices in 2022 will continue to rise to the pace we are currently seeing, “explains Ángel Talavera, from Oxford Economics. “This, mechanically, will mean that they will go from contributing several points of inflation as they are currently doing to a much lower figure, or even contributing negatively if prices fall,” he continues.

Rosa Duce: “Accumulated orders make it foreseeable that we will not see a ‘normal’ situation until well into the summer”

The economist uses an example: if energy prices stay where they are, they will go from growing at 30% -40% currently to 0% next year when comparing year-over-year. “That is why I consider it unlikely that we will see an inflation close to 5% in 2022, even assuming that the underlying inflation will probably continue to rise gradually”, he influences, and concludes: “Now, in the previous example, if the prices of energy does not fall substantially, we will continue to see a significant impact on family income and business margins. “

José Manuel Amor, managing partner of the economic and markets analysis area of ​​Afi, who before knowing the revision of the general inflation forecast of the ECB to 3.2% for 2022 already placed his at 3%, agrees that the moderation will come from the energy component “because it will be negative in October, November, December, although until then the CPI readings are still going to be high.”

“Although we expect the bottlenecks to be reduced little by little, as supply and demand readjust, the accumulated orders make it foreseeable that we will not see a ‘normal’ situation until well into the summer”, adds Rosa Duce , Chief Economist of Deutsche Bank Spain, who admits that “the base effect will work in our favor”, but considers that “it will not be until the last quarter of the year, which is when we will compare with the highest inflationary moments of 2021”.

The gas question

“Our forecasts point to an inflation at the end of 2022 that will still be above, although very close to 2%, and it will not be until 2023 when we will see figures below this barrier”, continues the expert. “In any case, we believe that inflation will not fall to levels as low as those that existed before the pandemic,” he concludes.

Most of the current increase in energy prices in the eurozone is related to gas shortages. “Due to the perspectives of transition towards renewable energies, there has been an underinvestment in the extraction of natural gas”, acknowledges Eric Dor, director of economic studies at the IESEG School of Management, who observes that, in addition, “many projects of exports to Europe have also been postponed in producing countries “.

Eric Dor: “There has been an excess of optimism about the speed with which green energy can replace fossil resources”

In the opinion of this French economist, “there has been an excess of optimism about the speed with which green energy can replace fossil resources, such as coal, oil and gas”, with geostrategic risks that make “these problems are going to take a long time to solve. ”

Regarding its impact on the general CPI, Eric Dor calculates that “even if energy prices remained at their current highs, their inflationary impact would progressively decrease throughout 2022.”

“Of course, if the shortage worsens, with, for example, an interruption of imports from Russia due to geostrategic factors, energy prices could increase even more,” warns this expert.

José Manuel Amor, from Afi, points out other collateral effects that the rise in gas has, such as the indirect impact on agriculture and food – one of the components of the CPI has risen the most in recent months, even during the 2020 lockdowns due to different circumstances-, by raising the cost of obtaining fertilizers, which “will be noticeable in 2022”.

Another inflationary element of the current conjuncture is that “the ecological transition requires huge investments that consume many basic products that are in short supply”, concludes Eric Dor.

Second round

Beyond the impact of the cost of energy and bottlenecks, the well-known second-round inflation appears, which is transferred from goods and services to workers’ wages, and which has already made an appearance in the United States. taking its peak inflation to 6.8%, according to the interannual CPI for November.

In theory, the loss of purchasing power due to increased headline inflation inevitably leads to wage increases, which then increase production costs and cause further price increases.

“Right now it seems more likely that this outbreak of inflation, driven mainly by commodity prices and pandemic-related supply shortages, will result in lower final consumer demand rather than wage rises, and that it could have an impact on the growth of the eurozon, “reflects Jim Leaviss, CIO of public debt at M&G de Investments.

“Union membership is much lower than it was the last time we saw a spiral in wage inflation, and the labor market is globalized, despite the Brexit and from some trade wars (for example, China), so if wages go up in Europe, manufacturing can move to Turkey, Vietnam or Mexico, which was not the case in the 1970s, so capital continues to prevail over the workers “, concludes the manager’s expert.