Swiss Re Institute has revealed insights into the inflation trends within the Euro area, anticipating a return to the 2% mark, consistent with expectations of economic normalisation.
According to a recent analysis, authored by By
The reinsurance giant expects to see euro area inflation to temporarily fall below 2% early in the second half of 2024, followed by a re-acceleration driven by base effects and persistence in services inflation.
Moreover, as of February 2024, euro area inflation was 2.6% year-on-year, down from slightly above 5% that was observed last summer, ultimately marking meaningful progress towards disinflation.
Swiss Re explained that it expects this downward trend to continue, with inflation likely to fall below 2% in the latter half of the year due to lower energy prices’ base effects.
But, a recovery is expected as these effects wane and services inflation remains high due to persistent wage growth.
The Institute also noted that the potential for continued shipping disruptions also poses additional inflationary pressure, especially during the peak shipping season later in the year.
Following the recent comments made by European Central Bank (ECB) president Christine Lagarde, Swiss Re stated that it expects that the ECB may initiate interest rate cuts as early as its June meeting. This is a noteworthy time, as rate cuts would come not much before when the reinsurer expects inflation to bottom and then drift higher.
However, Swiss Re warns against interpreting a temporary inflation uptick as a precursor to a widespread second inflationary wave. The reinsurer emphasizes that such a short-term increase, largely due to base effects, should not significantly impact inflation-sensitive insurance claims.
“Our baseline view still is that inflation is normalising over the medium term. We see a temporary and negligible re-acceleration primarily driven through base effects as having only a marginal effect on insurance claims in lines of business that are inflation sensitive,” the Institute notes.
Lastly, Swiss Re notes that the Euro area inflation is on a path toward normalisation, averaging around 2.1% in the coming decade.
But, the transition from the inflation increases seen in 2022-23 are expected to be uneven, with potential short-term deviations below and above the 2% target.
