The disinflationary process is accelerating. The advance CPI of July that will be released this Friday captures all the eyes of investors, as well as the index that will be known on Monday in the euro zone. It will come just 24 hours after the European Central Bank (ECB) raises interest rates for the ninth consecutive time, to 4.25%, before adopting a pause in August. It will close an eventful week with central bank meetings, macro data, corporate results and the hangover from the 23J general election.
But despite arriving last to the party will assume the prominence with a new decrease in levels that accelerates the disinflation of consumer prices. It will be more pronounced in Spain than in Europe. The consensus manages a cooling of three tenths to a year-on-year growth of 1.5% in July from 1.9% in June. In the month-to-month comparison, the CPI can contract four tenths. In August, this decline will worsen due to the step effect of energy compared to 2022. In the case of the euro zone, the same indicator will still exceed 5% this month.
After the drastic increase in gas and electricity prices in 2022 due to the war between Russia and Ukraine, the first half of 2023 has witnessed an equally drastic reduction in energy prices. TTF natural gas, the European benchmark, traded in a range of 150 to 200 euros per MWh in July 2022, while that month was consistently paid below 30 euros, representing a year-on-year fall of 80 to 90%.
In the same way, the Iberian Mibgas has registered decreases of equivalent amount in percentage, which in absolute terms is also the largest in history. In August, when the current historical records were set in 2022, the step effect will be even greater. In the specific case of gas prices in Europe, lower demand in 2023 due to the mild temperatures of the winter season and oversupply have been the main factors of the impact.
On the rebound, the impact of gas prices on electricity generation has been the main cause of the lower electricity prices, according to the semi-annual reports of the main operators in the sector in Spain. “Wholesale electricity prices registered a decrease of 57.1% in the first half of 2023 compared to the same period of the previous year”, said Naturgy, while Endesa explained on Wednesday that the lower cost of electricity has occurred “as a result, fundamentally, of the decrease in gas prices and the increase in renewable energy production”.
For its part, the average prices of the Brent barrel, the European reference, have been 25.8% lower in the first half of 2023 compared to the same period in 2022. In turn, fuels such as gasoline or diesel accumulate falls this summer compared to the previous one that exceed that percentage in gross terms, without counting the effect that the discount of 20 cents per liter that the Government promoted to compensate for the escalation of costs has had during the last year.
Accelerated disinflation for the ECB
The combination of the record decline in energy prices and the step effect compared to 2022 may lead this Thursday to the European Central Bank (ECB) being somewhat more lenient in its speech about upcoming interest rate hikes. Everyone takes for granted a rate hike from 4% to 4.25% for today, but doubts about the ability it will have to do so in September are many. “Certainly, it is now more likely than last month that the ECB will ‘end’ its monetary policy in July, without putting it at 4%. We can start to hope that the disinflation observed on a global scale is affecting the euro area in a more tangible way,” explains Gilles Möec, Chief Economist at Axa IM.
After Wednesday’s rate hike by the Fed, the pressure for the ECB makes it unfeasible, according to experts, for Lagarde to show signs of moderation. “What is missing, however, when we compare the European situation with the US, is an adequate slowdown in core inflation already evident in the data. Our own forecasts see it only for the last 4 months of the year. It is true that our forecasts were too high for June, but beyond the actual impressions of consumer prices, we are still impressed by the ECB’s attention to wage developments. As we have been repeating for some time, we find it hard to believe that the ECB is going to pause before it is”It’s clear that wage growth has started to slow, and that may only materialize after the September meeting,” says Möec.
