Inflation seen peaking next month 'and falling to 2% by the end of 2023'

The headline inflation rate in the eurozone 'will peak at around 11% in December then fall to just over 2% by the end of 2023'.

Inflation in the eurozone will likely peak next month at 11% and fall back to 2% by the end of next year, according to leading economics consultancy.

Falling prices of European wholesale gas will help in time to rein in the price pressures on household utility, and so-called core inflation which excludes energy will take a while longer to fall, Jack Allen-Reynolds, senior Europe economist at Capital Economics has predicted. 

"The association between wholesale gas prices and households’ utility bills is not quite as strong as that between oil and fuel prices. That’s due to the way energy markets are regulated, as well as long-term utility contracts in some countries which delay the pass-through of wholesale prices to consumers," Mr Allen-Reynolds wrote in an analysis. 

"Nevertheless, the year-on-year change in wholesale gas prices has plummeted in the last few months, which suggests that electricity and gas inflation will start to come down soon, most likely early in the new year," he said. 

That will mean the headline inflation rate in the eurozone "will peak at around 11% in December then fall to just over 2% by the end of 2023", he said. 

Economic expectations

The assessment comes as the early results of surveys of purchasing managers across the eurozone suggest that the economic slump may be easing as record inflation cools and expectations for future production improve.

A gauge measuring activity in manufacturing and services unexpectedly rose in November, according to S&P Global. While it still firmly indicates a recession in the eurozone is underway, it offers some room to think the downturn may be shallower than previously predicted. 

In Germany, Europe’s largest economy, purchasing managers at factories reported an improvement in the availability of supplies and shorter delivery times for inputs. Private-sector output still shrank for a fifth consecutive month, with France seeing its first contraction since February 2021.

For the eurozone, the data are consistent with a drop in GDP at a quarterly rate of just over 0.2%, according to S&P Global. 

Manufacturing downturn

It’s clear that manufacturing remains in a worryingly severe downturn, and service sector activity is also still under intense pressure,” said Chris Williamson, an economist at S&P Global. 

“A recession therefore looks likely, though the latest data provide hope that the scale of the downturn may not be as severe as previously feared,” he said. 

The survey for the UK also showed a continued contraction in private-sector activity, and S&P Global warned the UK economy is in recession, with the downturn expected to worsen heading into next year.

While eurozone orders continued to fall at a steep rate in November and employment growth moderated as a result, warm weather has alleviated some fears of energy shortages in the coming months. Price increases have also eased.

“Not only should this help contain the cost-of-living crisis to some extent, but the brighter inflation outlook should take some pressure off the need for further aggressive policy tightening,” Mr Williamson said.

 Additional reporting Bloomberg