For example, in its December estimates, the ECB assumes an average oil price of $86 a barrel and an average gas price of over €120 per megawatt hour. “We’re down on both counts,” says ING economist Carsten Brzeski. “And if you plug that data into a model, inflation will really come down.”
More factors
But that doesn’t mean we can breathe a sigh of relief, says Brzeski. “There are many other inflationary pressures in the pipeline, such as food prices.” A lot also depends on the weather conditions. ‘With the current mild temperatures, the demand on gas reserves is less, even the gas consumption was lower during the Christmas period than in other years. The question is what he will do next winter».
And the Chinese economy also plays a role. If that country opens up as the number of corona infections decreases, the demand for oil and gas there will also increase. “And that will drive prices up again,” Brzeski expects.
negative inflation
Theoretically, falling energy prices could also lead to a few months of deflation. “If current oil and gas prices remain at this level, we will have a negative energy price year-on-year in the coming months,” says Brzeski.
Core inflation excluding food and energy prices will remain high for the foreseeable future. The question, of course, is how permanent it is. ‘I don’t mean that inflation is falling sharply, we can’t adjust our forecast every two weeks. But we have to be very careful about this,’ says the economist.
Price stability
This expectation of lower inflation also raises the question of how far the European Central Bank should go with interest rate hikes. Klaas Knot, ECB board member and chairman of De Nederlandsche Bank, has previously said that interest rates will be increased several times.
“I’m not Klaas Knot, but if I were Klaas Knot I’d wait and see. But I understand Knot and the ECB, they want to play it safe. As a central banker, you don’t want to be blamed later for stopping rate hikes early,’ says the economist. ‘A central bank has only one job and that is price stability. They must take this task seriously.’