Price hikes and interest rates Inflation is falling but the ECB should stay the course

In the world of prices, there has been an incredible change. It appears that inflation has reached its peak.

The euro area's inflation rate was 10.6 percent in October of last year, but it dropped to 10.1 percent in November and 9.2 percent in December. While many economists believe that new highs are unlikely to be reached, it may rise a little bit again in January.

This does not imply that supermarket prices won't continue to rise. Many things have recently risen in price, including fruit, wine, and everything from bread to butter.

The pace of price increases has remained rapid throughout the year. The rate of consumer price inflation, as determined by the statisticians' basket of goods, isn't increasing as quickly as it once did.

It will now be exciting to see what this means for the monetary policy of the European Central Bank, given what is going to happen in March. In one and a half weeks, the next rate meeting will be held.

Even though the key interest rates have undergone four rounds of increases and the inflation rates are no longer in the double digits, the ECB must now find the strength to continue on its current course. The continuation of interest rate increases was confirmed by ECB President Christine Lagarde in Davos, and other ECB council members made similar remarks.

Therefore, it seems inevitable that the federal funds rate will increase by 0 percentage points in February. The decision on the interest rate in March is probably going to be more debatable.

To be completely honest, nobody knows with certainty what interest rate the ECB will finally reach in order to start tightening its monetary policy and slowing the economy. The voices that assert that the target has been met or exceeded, however, become louder as interest rates increase.

There has already been talk about whether a 0.25 percentage point rate increase in March might be sufficient. In fact, according to the financial markets, some people are even anticipating interest rate decreases, at least in the second half of the year.

Interest rate cut rumors There are three justifications that can be heard for such rate cuts, which the ECB itself has never promised. First, it might turn out that inflation is actually declining more quickly than initially thought.

That cannot be completely ruled out, and it is very possible that the decrease in inflation is currently being underestimated in the same way that the increase was in the past. Second, the recession might be worse than anticipated; this is not something that should be hoped for.

Thirdly, the american federal reserve may decide to take the lead in lowering interest rates, with the european central bank acting as a "Fed follower" in the process. However, there is a strong case to be made that the ECB should be more apprehensive about acting too little than too much at this time.

In contrast to if it turns out that it overdid it with the interest rate hikes over the course of the year and then has to make adjustments, if the inflation development slips away from you, it is associated with disproportionately higher costs to catch it again. Additionally, even though inflation has slightly decreased, it is still above the central bank's target of 2%.

Even the ECB itself anticipates that inflation will be on average 6.3 percent this year. The focus of the central bank must be on its objective In this circumstance, it is essential that the ECB remember its objective, price stability.

Inflation can, in fact, have the undesirable property of solidifying if it continues for a while. The previous year will be remembered as the year when the price of gasoline at the pump suddenly increased by two, when the price of groceries in the supermarket unexpectedly increased by a factor of two, and when heating costs increased by a factor of one-half.

For starters, if wages haven't increased as much as inflation would have predicted, many workers might choose to ignore the situation. However, it is completely understandable why they would become less willing as long as inflation continues.

Therefore, it is understandable why ECB Chief Economist Philip Lane has recently paid particular attention to how wages are developing and whether or not this could also increase inflation. A lot of uncertainties exist in the absence of that.

Nobody can predict how long the conflict in Ukraine will last, how the winter will behave, or how the price of energy will change. The fact that the inflation rate decreased in December was largely due to government interventions, such as the state of Germany's assumption of the December gas deduction, as well as the lower price of oil.

When the euro was trading more favorably, the ECB interest rate increases were somewhat noticeable. Before they fully manifest their impact, though, it will take some time.

In contrast to if it turns out that it overdid it with the interest rate hikes over the course of the year and then has to make adjustments, if the inflation development slips away from you, it is associated with disproportionately higher costs to catch it again.