The Main Data out today is for the Euro area, the forecasted figures for January would suggest that both Inflation and core Inflation is coming down; Inflation has been on an upward trajectory throughout the Pandemic; rising from 4.1% in Oct, 4.9% in Nov to 5.0% in December.
Exactly 1 year ago in Jan 2021, inflation in the Euro area stood at just 0.9% and has sharply risen every month except in Feb and June 2021 where it remained static and dropped from the previous month, respectively.
Inflation rates have varied across the 19 EU member states, with Estonia witnessing 12% inflation back in Dec, whilst Malta saw an interest rate of 2.6%
The main factors for rising inflation have been the cause and effect of the Pandemic, mainly global supply chain issues causing production issues, travel restrictions and workforce problems.
Rising energy costs have been the main catalyst for inflationary rises, exacerbating supply problems, particularly across the transport sector, which had the highest rate of inflation across all sectors within the EU.
The 4.4% forecast would indicate that some of the supply chain issues have eased off and that inflation levels will start to fall throughout 2022. Governing Council Member Klaass Knot indicated back in December that the ECB would look to conclude its bond purchases by the end of 2022 and look to raise rates in early 2023.
Last week WHO Europe Director Hans Kluge stated that the Omicron Pandemic is reaching an ‘endgame’, meaning the effect and impact is subsiding across Europe. If the 4.4% Inflation Forecast is met or bettered then the ECB may be on course to raise hikes early next year.
The main data release for the rest of the week will be the BoE and ECB Interest Rate decisions on Thursday. Whilst no hikes are expected from the ECB, the Bank of England is forecast to raise rates from 0.2% to 0.5%, the first back-back-to-back increase since June 2004.
The general consensus is that all 9 Members of the BoE Committee will unanimously vote for a second hike, mainly because of soaring energy bills and the rising cost of living. December inflation was a 30 year high at 5.4% (last seen in March 1992) due to soaring gas and electricity prices, higher cost of food, clothes and footwear.
A second-rate hike may help to curb Inflation, which is expected to hit 6% by April.
If the rate hikes are confirmed on Thursday, then it should not impact the Pound too much as it’s already priced in.
