Our chart shows that in the euro zone, the level of surprise has climbed to an all-time high. Inflation surprises have turned out to be much greater in the euro zone than in the United States, where they are leveling off. The market has clearly underestimated the risk of inflation in the region and the acceleration of inflation could continue in the near term. The euro zone producer price index for November will be released later this Thursday (10:00 GMT). It should rise to + 22.9% year-on-year, after ending October at + 21.9%. This will push the consumer price index up in the coming months. The price increases are such that some companies have no choice but to pass them on to consumers to preserve their margins.
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What are the factors underlying this acceleration in inflation? Are they doomed to endure?
Base effects are a major factor, but one that should wear off quickly. The disappearance of the base effects induced by the reduction in VAT in Germany (a factor contributing largely to inflation in the euro zone) will have the mechanical consequence of a slowdown in inflation from the first quarter of 2022. There is also a debate on price / wage spirals in the euro zone. Wage increases have been larger in some countries, particularly in Germany. However, according to the latest figures available, there is no evidence that the pressure on wages is intensifying in the euro zone. On the other hand, supply difficulties and rising energy prices are two factors contributing to the acceleration of inflation. Bottlenecks in Asia will persist as long as China pursues its “zero covid” strategy. China has no intention of reopening its borders in 2022 (see this excellent article in The Economist). On January 3, Molle Maersk, world leader in maritime transport, indicated that the bottlenecks were not about to be resolved. According to the group, sea freight costs will remain high for most of 2022.
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The question now is whether the recent drop in energy prices (especially natural gas) will be sustainable. In the absence of reserve gas production capacity in Europe, the demonstrations taking place in Kazakhstan, a net exporter of gas (15 billion cubic meters in 2020) could have an impact on local production and push prices up again. of European gas on the rise in the short term. However, the energy component (9.5% of the overall HICP index) could weaken from March / April with the mildew.
However, we believe that inflation will remain on average abnormally high in the euro area in 2022. This will seriously undermine the accommodative policy of the European Central Bank. The services component (41.8% of the overall HICP) could prove to be problematic. After energy, the sharpest price increases occurred in the service sector in November. There is no indication that this trend will end in the coming months. The final index of purchasing managers in the services sector in the euro zone confirmed this trend in December. Despite a slight easing of price pressures, the euro zone is overheating: input and output costs recorded the second largest increase in history.
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What will the performance of the stock markets be in a context of accelerating inflation?
Inflation fuels market volatility. History shows that stock market performance is poorer when inflation is higher than expected, and that small caps tend to outperform tech stocks and large caps in regions where inflation is higher than expected. The explanation is that small businesses can handle inflationary pressures faster than large businesses. Investors view small businesses as safe havens against price increases during times of high inflation. It’s a safe bet that this phenomenon will occur again in 2022.
Consult our Inflation Indicator to understand the possible impact of the return of inflation on the financial markets and to benefit from relevant information and investment strategies.
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