Eurozone HICP Preview: Forecasts from nine major banks, inflation rate falls once again

In the Euro Area, inflation is likely to have fallen further from 2.9% in October to 2.7% in November. While the downward impact of energy prices on inflation is diminishing, the upward trend in food and non-energy prices continues to weaken. The core inflation rate is likely to have fallen from 4.2% to 4.0%. The further decline in inflation could fuel hopes of an early interest rate cut by the ECB. However, there is a risk of disillusionment as early as December when inflation jumps back above 3%.

We expect both headline and core inflation to be lower relative to October. Softer inflation should keep the ECB on the sidelines and prevent additional rate hikes, while lower inflation should support real disposable incomes and purchasing power across the Eurozone. Despite those dynamics, the Eurozone economy is approaching recession. Activity has not been all that robust, while sentiment indicators suggest a contraction in economic outlook could be imminent. As the Eurozone fades into recession, the ECB could be one of the first major G10 central banks to cut rates; however, we believe easier monetary policy is still a ways off at this time.

Inflation dropped more than expected in September and October, and the question now is whether the low inflation trend will continue. We expect some continued improvement, with core inflation falling to 4% and headline inflation dropping to 2.7%. Still, there are signs of continued inflation pressures that shouldn’t be ignored after a few encouraging data releases. The November PMI showed that businesses still see increased input costs, resulting in more survey respondents indicating that selling price inflation ticked up. Thursday will tell us whether inflation has continued its rapid normalisation.

We expect Euro Area November flash HICP to continue easing both in headline (2.7% YoY; Oct 2.9%) and core (3.9% YoY; Oct 4.2%) terms, slightly below consensus forecasts. Some of the negative base effects, which have pushed the headline figure lower over the past months, are now fading and we expect headline inflation to remain close to 3% towards next summer.

We see the headline November print for the Eurozone at 2.7% (2.9% in October) and core at 4.0% (4.2%).

We expect the disinflation process in the Euro area to continue in earnest. We forecast Euro Area headline HICP inflation to decline to 2.6% YoY in November (from 2.9% in October), and expect core HICP inflation to fall by 0.2pp to 4% YoY. We expect weakness from the energy component, primarily from falling gas and fuel prices. For core inflation, November is typically a month when we see price declines, though we expect less pronounced price declines than during the immediate pre-pandemic period. Risks remain, however. Continued declines in crude oil prices may mean weaker fuel prices, but natural gas prices have been rising since the middle of the year. On core inflation, risks are likely to the upside.

We see Euro Area headline inflation decreasing further in November to 2.6% YoY and the core rate falling 0.4pp to 3.8% YoY. However, these drops are largely due to base effects, and we believe the narrative may be turned on its head later. 

Euro Area headline inflation has been on a remarkable downward path since the end of last year, and we expect yet another decline in Nov to a 28-month low of 2.6% YoY. We expect core inflation to fall to 3.8% YoY. However, this decline, and most of Oct's, will likely be reversed in Dec, when we expect inflation to jump back into the mid-3% range. As such, any large dovish market reaction to the prints this week may prove temporary. 

We expect another step down in Euro Area headline inflation to 2.7% YoY in November from 2.9% in October and 10.1% just one year ago, a tad lower than envisaged just two weeks ago, due to still-falling fuel prices at the pump. Core inflation should also edge lower but only slightly this month, to 4.1% from 4.2% in October, with only an apparent re-acceleration in sequential MM growth (SA) to 0.3% (vs 0.15-0.2% MoM in the past two months).