European Commission predicts fall in inflation, but warns of loss of income

The European Commission this Monday revised down its forecast for eurozone inflation this year to 5.6%, saying tight monetary policy was “working” but warned of revenue losses and downgraded its forecast for 2024.

“More restrictive monetary policy could have a greater impact on economic activity. […] monetary policy is working as intended, as evidenced by the continued sharp slowdown in private sector credit flows, [mas] Its negative impact on domestic demand will increase if it is accompanied by a deterioration in household and corporate incomes, which in turn will affect economic sentiment and the ability of banks to finance growth,” says the community leader.

In its summer economic forecasts published this Monday, in a scenario of timid economic growth and weak consumption amid a slower decline in inflation and tight monetary policy, the European Commission forecasts inflation at 5.6% this year and 2.9% in 2024 year. eurozone, whose percentages compare with 5.8% and 2.8% in previous forecasts published in May last year.

In the EU as a whole, inflation is expected to be 6.5% this year and 3.2% in 2024, up from previous forecasts of 6.7% and 3.1%.

The institute adds that measures taken, such as raising interest rates, could “lead to a faster fall in inflation than expected, accelerating the recovery in real incomes.”

However, according to Brussels, “changes in inflation may be unexpected, either downward or upward” as weakening domestic demand could cause it to be “less resilient than expected” but could also lead to higher wages, leading to “stronger monetary growth.” a policy reaction that has negative consequences for economic growth.”

In this context of uncertainty, “the evolution of food and energy prices, which is assumed to reflect a downward trend in these forecasts, continues to be subject to risks and exposes the inflation outlook to some uncertainty,” the agency emphasizes.

According to Brussels, retail energy prices, which are putting more pressure on inflation due to the energy crisis and war, are expected to continue to fall until the end of 2023, but at a slower pace, with the forecast “lowering”. will increase slightly again in 2024, driven by rising oil prices.”

“Services inflation is expected to remain moderate as demand slows under the impact of monetary tightening and fading momentum from Covid-19. Other non-energy components of the consumer basket will continue to weaken inflation. inflation over the forecast horizon, which also reflects lower prices for factors of production and normalization of supply chains,” he lists.

Another factor to consider in these forecasts, according to the community leader, is the occurrence of extreme weather events such as heat waves and floods.

“Increasing climate risks, illustrated by extreme weather and unprecedented summer bushfires and floods, are also weighing on the outlook. The materialization of these risks entails significant costs for the EU economy in terms of losses of natural capital and deterioration in economic activity, including tourism. “, concludes the European Commission.

By this time, inflation rates had stabilized in 20 countries with a single currency.

The eurozone’s annual inflation rate remained stable in August from July at 5.3%, but below the previous year’s 9.1%, according to Eurostat.

Inflation has been falling in recent months after reaching historic levels due to the economic reopening from the Covid-19 pandemic, the energy crisis and the economic fallout from the war in Ukraine, but is still above the 2% target. .European Central Bank (ECB) to ensure price stability.

To achieve this, the ECB has tightened monetary policy, consistently raising interest rates, but now at a slower pace.