The unprecedentedly high inflation in the eurozone will not last long, but its return to the two percent target will take years. Experts contacted by Reuters think so.
Inflation is five times the ECB’s target
The average annual inflation rate in the eurozone is currently around ten percent. Although there was probably a slight decrease in November compared to October, inflation still remains at five times the European Central Bank‘s target. And although the latter took action against inflation by raising its base interest rate several times, Europeans should prepare for a longer-term disinflationary trajectory.
Wage requirements and compensation
While the initial inflationary shock came through energy prices, there is now a danger that the eurozone, as well as the EU, will experience another round of inflation. Energy prices are reflected in the prices of other types of goods, and it is only a matter of time before wage demands to compensate for the decline in real wages begin to escalate. “The knock-on effects will encourage inflation next year and the year after,” ECB chief economist Philip Lane told Reuters. And the ECB itself is already starting to count on the return of inflation to the target sometime in 2025. “Core inflation will not peak in the first half of 2023,” added Commerzbank analyst Christoph Weil, adding that the risk of elevated inflation expectations is growing.
