Euro Area Economic Activity Decelerates Amid Uncertain Inflation Outlook
The European Central Bank is expected to maintain steady interest rates on Thursday due to a slowdown in economic activity across the euro area. Shoppers in the region are cutting back on spending due to inflation eroding their disposable income, while the manufacturing sector has been declining since mid-2022.
It is uncertain whether these factors will lead to lower inflation, as economic theory suggests. Some experts argue that weaker growth will eventually result in lower inflation, while others believe that part of the growth weakness stems from supply rather than demand, making price pressures less sensitive to weaker growth than expected.
In August, headline inflation slightly exceeded expectations at 5.3%. However, core inflation, which excludes energy and food, fell in line with expectations to 5.3% as well, down from 5.5% the previous month.
ECB Staff Projections and Uncertain Outlook
Further insights into the European Central Bank’s views on inflation and economic growth will be provided in the upcoming staff projections. The market anticipates revisions to the ECB’s GDP and inflation outlook.
Given recent data, the staff is likely to revise down the near-term growth outlook. Tighter financial conditions and slower growth are expected to result in lower core inflation levels by the end of the forecast horizon.
President Christine Lagarde emphasized the uncertain outlook at the Federal Reserve’s annual conference in Jackson Hole. Over the past few years, numerous shocks have had lasting effects on the economy and monetary policy transmission.
Lagarde stated, “We must form a view of the future and act proactively. However, we will only truly understand the consequences of our decisions after the fact.”
