Inflation in the eurozone and Portugal is expected to continue to decline next year, after central banks, households, and companies struggle against rising prices, according to economists consulted by media outlet, Lusa.
After years of low inflation rates, the reopening of the economy after the pandemic and higher energy prices sounded the first alarms in the final stretch of 2021.
The phenomenon intensified throughout 2022, leading the European Central Bank (ECB) to raise interest rates for the first time in 11 years in July of that year, to return the inflation rate to the 2% target.
Although the war in Ukraine shows no signs of ending, the impact on energy and food products has eased, and throughout 2022, the first signs have begun to emerge that inflation may be on a downward path, which according to economists should be confirmed as sustained in 2024.
“The pace of decline in inflation that we see from the summer onwards is not expected to be repeatable due to base effects. For 2024 three important aspects are contributing to lower inflation: monetary policy is restrictive, the evolution of energy and other commodity prices is encouraging and we are facing a slowdown in activity,” explains the president of IMF – Financial Markets Information.
However, the economist points out that, “2024 should not be so bad for consumption as we will have relief in interest rates and inflation, and wage recovery.”
“There will probably be an increase in disposable income compared to 2023 in many cases, which should support consumption and prevent such a sharp drop in inflation. The prices of goods should rise little or nothing, but as long as unemployment does not increase, the prices of services should continue to be supported,” he says.
The economist points to a range of average non-harmonised inflation between 1.8% and 2.3% in Portugal in 2024, believing that the ECB’s forecast of a rate of 2.7% in 2024 will be revised downwards throughout the year.
Banco Carregosa’s senior economist Paulo Rosa also predicts that it is “very likely that inflation will continue to decelerate in 2024, and a deflationary period cannot be ruled out if the Portuguese and eurozone economies enter recession.”
The euro area’s annual inflation rate fell to 2.4% in November, according to the flash estimate released by Eurostat.
This figure, the lowest since July 2021 (2.2%), compares with 2.9% in October and 10.1% in November 2022, as measured by the Harmonised Index of Consumer Prices (HICP).
ISEG professor António Ascenção Costa believes that “the recent fall in inflation, faster than expected, is due to the resolution of the supply problems that were at the origin of the initial inflationary outbreak.”
“Without worsening geopolitical tensions, with unpredictable impacts on the global supply of some raw materials or even specialised goods, the evolution of inflation should continue downwards,” the economist predicts about developments next year.
The director of the research office of the Forum for Competitiveness, Pedro Braz Teixeira, pointed out that “the war in the Middle East remains circumscribed, inflation is expected to continue its downward trajectory.”
Despite the relative optimism, ECB policymakers have stressed that it is not yet possible to “declare victory” against inflation, warning that reaching the desired 2% will still take some time.
ECB President Christine Lagarde has repeatedly called for prudence in wage increases, warning that inflation was now being driven more by domestic sources than external ones.
“Wage pressures, however, remain strong. Our current assessment is that this mainly reflects ‘recovery’ effects related to past inflation, rather than a self-fulfilling dynamic. And we expect wages to continue to be a key driver of domestic inflation,” he said.
The coordinator of NECEP – Católica-Lisbon Forecasting Lab, João Borges de Assunção, considers that “there is a risk that wage increases above” the 2% target, between 2022 and 2024, could hinder the ECB’s work.
In the last projection in October, NECEP pointed to a central point for inflation in the euro area in 2024 between 3% and 5% and slightly lower in Portugal, between 2.5% and 4.5%.
“The inflation data for October and November, however, came out quite good, which makes the values at the bottom of the projection ranges more plausible,” he explains.
For the economist, “the evolution of interest rates is now more uncertain,” since “those who argue that the increase in interest rates was once enough to fight inflation now have arguments,” but “those who fear that wage increases will have repercussions on permanent price increases, particularly in the service industry.”
“The ECB will probably want to calculate the monthly inflation rate over the coming months, purged of volatile components, consistent with annual inflation of 2% before considering that the problem of this inflation episode between 2021 and 2023 has been solved,” he concluded.
Samantha Gannon
info at madeira-weekly.com
