The first indications are that inflation in Europe may have begun to stabilize and could start to gradually ease in the coming months. But if it is a turning point, it is the slow turning point of an ocean line as heavy and complex as the eurozone’s 11,600 billion turnover economy. The most recent preliminary data, those for the month of November (over here, Istat data for Italy), differing from a long series of previous months in one key detail. For the first time since June 2021 they show a decline: the inflation rate in the eurozone is falling from 10.6% in October to 10% this month.

Core inflation is stable

If it was a surprise, it was expected after data signals on changes in consumer prices coming from Germany (down 0.3% to 11.3%), Spain (down 0.7% to 6.6%) and the Netherlands (down from 5.6% to 11.2%). After a long time, so-called core inflation, according to insiders, also stabilized in November, which estimates all prices except those most subject to sudden changes: energy, food, alcohol and tobacco. Even core inflation, that is, inflation of everything other than gas, oil and the shopping basket, fell from 5.02% to 4.95% in November (when the rounding was cancelled). As for energy inflation, it fell by more than six points from 41.5% in October to 34.9% in November.

Effects on food

What is happening? Quite simply, you are beginning to notice the effects of two forces that have been on the horizon for months and are linked to each other in price trends. The first is the effect of commodities on indices. From food to gas to electricity, almost everything is still very expensive. It’s just that many products haven’t started to be more expensive than they were a year ago, so the year-over-year price variance — that is, inflation — is no longer rising. For example, the global food price index for the Food and Agriculture Organization, the United Nations agricultural production agency, is still more than a third above its 2019 or 2020 levels. Thus the pressure on the budgets of those who shop, especially in the lower middle classes and even in poor countries, remains high. But this indicator today, for the first time in years, is no higher than it was a year ago. So the effect of zero inflation (and even in Europe the cost of food goes down).

Gas and oil

Thus, the price of natural gas also remains alarmingly high, showing that the energy crisis is far from over. Today, however, it travels at a rate of 142 per megawatt-hour (an increase in the past month), while in December 2021 it reached more than 180 euros after Vladimir Putin ordered the first distribution of food rations in Europe as a prelude to war. Here too, the change in prices will soon be negative and with it the impact on inflation, although the pressure on the budgets of households and companies remains unbearable with prices seven times the usual rate until the beginning of 2021. The same dynamic is more evident on oil: this month there was a decline of about 15%, and at current prices, the change in October 2021 is zero, even if a tank full of gasoline continues to cost very dearly.

China risks

The second force that curbs inflation is naturally related to the first force, because the European and global economies have been slowing down for months. Hence, in particular, the relative weakness in the prices of crude oil and foodstuffs, which are two of the main factors that led to the rise in prices over the past year and a half. Does all this mean that the fear of inflation is behind us and that central banks can stop raising interest rates? Most likely not. First, because many other factors could inflame prices in the months ahead: Not all companies have already imposed the hikes needed to recoup the cost increases; Moreover, the spread of protests or a new lockdown in China could once again lead to the closure of the world’s most important factories or ports, once again disrupting industrial supply chains and raising price lists for scarce products.

central bank

Then there is the wisdom of central bankers. They were really surprised to the upside by inflation in 2021 and the first half of 2022. They underestimated it and now they’re not going to give it up until it’s really nodded, close to their 2% target. But this will take a long time. The European Central Bank and possibly the Federal Reserve will also likely raise interest rates and tighten their balance sheets less quickly and aggressively from now on. They’ll be a little more gradual. But they won’t stop. Not at the moment.