Looking ahead, the path of headline inflation remains highly affected by the war in the Middle East and oil prices. On top of this, the start of the winter heating season, combined with low gas storage levels, is also likely to push up gas prices in the coming weeks, translating into higher retail prices at the start of next year. As a result, we expect headline inflation to increase again and remain above 3% towards the end of the year and in early 2027. It could now take until the end of 2027 before headline inflation drops below 2% again.
As worrisome as this might sound, the current inflation picture remains structurally different from the inflation wave in 2022. Despite a recent increase, selling price expectations in services and manufacturing remain below their April and May levels. At the same time, consumers’ willingness and also financial ability to pay higher prices are much lower than in 2022. As a result, it will be hard for companies to pass through higher production costs. Instead, margin squeezing will be the only game in town.
For the ECB, today’s German inflation data will comfort the doves as the numbers show that there are still no indirect or second-round effects in sight. If this situation remains unchanged, even a December rate hike might not be a done deal, yet. For the ECB to continue on what ECB President Christine Lagarde yesterday called ‘the direction of travel is clear’, some knock-on effects from higher energy prices would be useful.