Eurozone inflation will reach double digits in the autumn and last longer as a result of the sharp rise in gas prices, economists warn.
Higher inflation expectations are mounting pressure on the European Central Bank to consider a bigger rate hike, despite many economists predicting a deepening recession as rising energy prices hit business and consumer activity.
ECB policymakers warned at last weekend’s central bankers’ meeting in Jackson Hole, Wyoming, that greater sacrifices in terms of lost growth and jobs will be needed to bring inflation back under control.
The European gas price last week hit a record €343 per megawatt hour, more than double the price at the end of July and seven times the price in the same period last year. Reduced flows of Russian gas have heightened fears of shortages, with the EU preparing emergency measures to curb rising prices.
Many economists, who have also revised their inflation forecasts for next year, now predict that annual consumer price movements will accelerate from the record high in July of 8.9 percent to more than 10 percent in October. They expect the August inflation rate, to be announced on Wednesday, to reach 9 percent.
“The rise in gas prices is another major blow to European economies,” said Holger Schmieding, chief economist at financial firm Berenberg. “Higher prices for consumers and higher costs for businesses will deepen the recession and worsen the inflation outlook.”
Economists surveyed by Consensus Economics have revised their inflation forecasts for the eurozone for 2023 this month to an average of more than 4 percent, double the ECB’s target of 2 percent and almost one percentage point higher than the average forecast in June. That month, the ECB predicted inflation would fall to 3.5 percent next year; it will update its forecast at its next meeting on September 8.
The economists’ consensus forecast for eurozone gross domestic product in 2023 has become increasingly bleak, with June growth expectations slashed to less than 1 percent.
Many are more pessimistic. Schmieding revised Berenberg’s 2023 forecast for eurozone GDP to contract 1.5 percent, while raising inflation expectations for that period from 5 percent to 6.1 percent.
“A full pass-through” of wholesale gas prices of about €200 per MWh would add 7 to 8 percentage points to German inflation, Schmieding said. But the added pressure would ease from long-term gas contracts, delays in higher prices moving through the manufacturing process, companies taking on some of the costs and government restrictive measures, he added.
After countries were boosted by a tourism revival this summer, the eurozone’s GDP is “likely to contract significantly until spring 2023 as private consumption, business investment and exports decline,” Schmieding said.
The impact of rising gas prices on eurozone growth could be long-lasting, warned Andrew Kenningham, Europe’s chief economist at Capital Economics.
“The eurozone is less likely to regain its pre-pandemic trend growth rate as there will be a permanent loss of competitiveness leading to some loss of activity, especially in sectors such as metals and chemicals,” he said.
Five-year inflation swaps, a market indicator of where inflation will stand in five years’ time, has risen in the eurozone in recent weeks.
Giada Giani, an economist at Citi, expects inflation in the eurozone to peak at 10.3 percent in the fall, with higher energy costs and the euro falling below par, while the dollar contributes to higher consumer prices.
She noted that “more importantly, the entire inflation trajectory has shifted higher for 2023,” with Citi’s 2023 average now at 6.2 percent, up from 4.8 percent in July with higher prices for items such as food. and energy-intensive services embedded in the new projections.
While the biggest upward revisions in inflation were forecast for Germany, the Netherlands and Spain, many economists noted that the policy response will be vital in controlling energy price growth.
For example, Germany plans an additional gas tax from October, although the impact on households is partly offset by a reduction in VAT on gas sales. But several other temporary measures taken by governments to cushion the blow of high prices, such as Germany’s €9 train ticket expiring on September 1, will soon end, which could push inflation even further.
Additional reporting by Martin Arnold in Frankfurt