06.Jan .2023 14:16

Inflation in the eurozone falls back to single digits as downward trend continues

Inflation in the eurozone falls back to single digits as downward trend continues
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Annual inflation across the eurozone fell back to the single-digit territory and stood at 9.2% at the end of December, down from the 10.1% registered the previous month.

It comes as gas prices, one of the main drivers behind last year's record-breaking inflation, returned to pre-war levels amid unusually warm weather.

Although the news can be seen as a positive development, the eurozone's inflation rate represents almost five times the 2% target set by the European Central Bank.

However, core inflation, which excludes the volatile prices of energy, food and tobacco and therefore gives a more accurate picture of the state of the economy, remained stuck at 5% for the third consecutive month.

According to FT, further falls are expected in the coming months, following the decline in energy prices since the start of the year. The impact of last year’s surge in power costs following Russia’s invasion of Ukraine will also soon fall out of the index, lowering the headline figure substantially.

Carsten Brzeski, head of macro research at Dutch bank ING, predicted that euro area inflation could even drop back to the ECB’s 2 per cent target by the end of 2023.

If the recent falls in gas prices continue, the ECB will almost certainly have to downgrade its inflation projections for this year. The central bank said in December that prices would rise 6.3 per cent over the course of 2023, based on assumption for natural gas prices to average €124 per megawatt hour over the whole of this year.

But the price of the Dutch TTF benchmark European gas contract has fallen about 10 per cent this week to just €69.70/MWh as of Thursday afternoon — a level 80 per cent below the August high of €340/MWh.

“The ECB’s own inflation projections are currently too high, just judging from the technical assumptions for gas and oil prices and where these prices are currently,” said Brzeski.