European Central Bank: Core inflation pressures and rate path – Commerzbank

Commerzbank's Dr. Vincent Stamer examines euro area inflation, noting that soaring energy costs are already impacting goods and services pricing. The bank's Quant Model predicts headline inflation will hover around 4% in the near future, with core inflation surpassing 3% within the next year. This projection indicates the European Central Bank might have to adjust its predictions and increase interest rates once more.

Although core inflation in the euro zone is presently growing modestly, a deeper analysis reveals that high energy prices are already inflating goods and services prices. In the coming year, this indirect impact is expected to escalate sharply, leading to further rises in the core rate. Our Quant Model anticipates a gradual increase in the core rate to over 3% within the next twelve months.

Consequently, the ECB would need to revise its forecasts upwards again and most likely raise key interest rates for the second time. As in recent months, the model, utilizing data from October 16, anticipates an inflation rate of just under 4% for the upcoming months. Forecasts do not anticipate a decline in inflation until spring, primarily due to base effects and lower oil prices.

According to our projections, core inflation is expected to climb from its current level of 2.5% to over 3% by the autumn of next year. This increase is attributed to companies having endured high energy prices for over half a year, which they are now progressively passing on to consumers. Based on our present forecasts, the ECB is likely to revise its expectations again in December, aligning with our expectation of an ECB interest rate hike in December.