There’s a consensus among economists, and the figures back them up, that inflation has peaked. Not that the current price pressures, and associated erosion in buying power, are behind us, just that the highest rate of annualised price growth has probably already come and gone.
The latest flash estimate for Irish inflation from the Central Statistics Office (CSO) indicates prices here grew at an annual rate of 7.7 per cent in the 12 months to January this year, down from 8.2 per cent in December.
Eurostat figures for the euro area, due out on Wednesday, are expected to show a similar softening in headline price gowth.
The consensus, however, breaks down at that point. Some analysts believe we’ll see a return to more moderate price growth relatively soon (by the end of 2024) while others believe we will experience what’s known as sticky inflation. In other words, elevated price growth will linger in the system.
The logic here is that price growth has passed from commodities such as oil and gas into services such as childcare and insurance, which translate more readily into wage demands, and which reverberates back into higher prices, keeping generalised price growth higher for longer.
The high priest of this analysis is Egyptian-American economist Mohamed El-Erian.
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While the European Central Bank and the US Federal Reserve aim to bring inflation back down to a 2 per cent range, El-Erian believes this process, even with the impact of higher interest rates, might stall at around the 4 per cent range.
“Increasing wage pressure” is driving this change, he said in a recent article.
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“This transition is particularly noteworthy because inflationary pressures are now less sensitive to central bank policy action,” he wrote.
“The result could well be more sticky inflation at around double the level of central banks’ current inflation target.”
If he’s proved right, central banks will likely have to keep interest rates higher for longer, and that will have consequences for wages (nominal versus real), for house prices and for a myriad other variables in the economy. It also will drive many so-called “zombie” firms with high debt loads and weak cash flows out of business.
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More immediately, better-than-expected growth numbers for the euro area are likely to make the ECB less worried about the growth impact of higher interest rates and therefore more likely to press on with monetary tightening.
The bank is expected to hike interest rates by another 0.5 per cent on Thursday, the fifth increase in six months, placing further pressure on mortgage holders here.