Inflation will it still be hot in 2024? It has clearly calmed down in 2023, both in the United States and in the Eurozone, under the influence of the restrictive monetary policy implemented since March 2022 by the Fed and from July 2022 by the European Central Bank (ECB).
US one-year inflation fell from 7.1% year-on-year in November 2022 to 3.1% last November. In Europe, however, it fell from 10.1% to 2.4%. In France, where the price increase was less pronounced due to the implementation of different price shields and the capacities of our nuclear fleet, the decrease is also significant: +3.4% y/y last November compared to +6.2% a year earlier .
However, inflation has not stopped as it has plagued central banks, which have opted for a pause in policy tightening for the time being. A balancing act, especially in Europe where growth is slow. Added to this is the increased pressure on the public debt, the inhibition of investment and the blocking of the real estate market. So what can we expect from 2024 in terms of inflation? L’Express, with the help of five economists, identified three scenarios whose probability seems more or less strong: a continued decline, a plateau and a recovery.
#1 The decline continues
The ECB has made it a hobby and doesn’t seem ready to give it up: 2% inflation target remains in his crosshairs. It expects that keeping its key rates at current levels will continue to have effects in the coming months.
The European institution forecasts an average price increase of 2.7% in 2024, then 2.1% in 2025 and finally 1.9% in 2026. But to economist Patrick Artus, the 2% target seems even more at risk than before , especially due to stagnation. productivity.
However, wage growth seen in 2023 is expected to continue in 2024 and inflation is not expected to decline without productivity gains. “Returning to 2% within a year will not be so easy, and stabilization around this level will be even more complicated,” estimates Mathieu Plane, deputy director of the OFCE’s analysis and forecasting department.
The scenario of falling inflation seems all the more optimistic because there are many unknowns. “The main ones come from global trade and especially the effects of military conflicts in the Middle East.
Another type of uncertainty that we will have to get used to is related to the climate and the potential consequences of extreme temperatures on prices and production, which are likely to increase in the coming years,” adds Eric Monnet, director of EHESS studies and professor at the Paris School of Economics.
#2 The board
This is the scenario that seems most likely for 2024. Véronique Riches-Flores, founder of Riches Flores Research, expects low inflation in April at around 2.5% in the eurozone, which would prompt the ECB to change policy. : “Disinflationary forces will multiply early in the year, leading the central bank to cut interest rates”.
So we would see a further decline in inflation over the course of a year, during the first quarter, before it stabilizes and reaches a stable level. “That alone is very satisfying. The question behind it is: will economic activity be sustained, or will we face a recession?” asks the economist.
Mathieu Plane confirms: “The slowdown in price growth will approach 2.5% by the second half of 2024. An encouraging trend that we could not have imagined just a few months ago. “In fact, the drop in raw material prices was more pronounced than expected: with the slowdown in growth, demand was not very dynamic, which reduced tensions,” continues the expert.
Tray would not help matters for the Governing Council on the Frankfurt side, which would eventually be forced to cut rates before reaching its 2% target due to the risk of a recession. However, monetary easing promises to be limited, according to Patrick Artus.
“Financial markets believe the ECB will respond to strong disinflation from March 2024 by cutting 150 basis points. This is completely unreasonable, at best a cut of 25 or 50 basis points.”
#3 Rebound
The war in Ukraine has shown that the economy can reach a tipping point at any time. “The international environment is unstable. We have always been surprised in this respect, so we cannot rule anything out,” admits Mathieu Plane. It is therefore difficult to rule out the scenario of a rebound in inflation.
At Groupama Asset Management, “it seems to us that risk is on the rise, not on the way down,” explains Christophe Morel, the asset management company’s chief economist. “We clearly see that companies don’t want to cut their margins. If they do.” wage inflation, it will lead to an increase in prices. In the case of a gradual recovery of the industry in 2024, the cost of raw materials will increase again,” the specialist points out.
Another factor may weigh in: energy transition. “Economic transitions are inherently inflationary. The production processes have been well defined. The energy transformation involves their development using new resources that are more scarce,” emphasizes Christophe Morel. This evolution of production models “raises the question of this alignment between the current inflationary cycles and the goals of the energy transition, which are more inflationary”, adds Mathieu Plane. Almost a taboo subject.