Global inflation in the Eurozone will remain above the European Central Bank's target for a long time to come. However, energy inflation will decline over the next few quarters. This is what emerges from our latest study. We expect an inflation of 2.8% in 2024 and believe that the ECB will miss its medium-term inflation target.

According to the ECB, inflation will fall back to 2% in 2025. Our research department predicts a different scenario. “We have to learn to live with structurally higher inflation than we were used to before the pandemic,” says Johan Geeroms, our Director Risk Underwriting Benelux. “Inflation is currently falling, mainly due to the normalization of energy prices, but the question is how low? According to Eurostat, Belgium now has the second lowest inflation rate in the euro zone, at 5.5%. Only the Grand Duchy of Luxembourg does better, with 4.8%. Our research department looked at the structural factors that drive or slow inflation. The conclusion is that the strength of the inhibiting factors is diminishing and that of the drivers of inflation is actually strengthening.”

In addition to cyclical (economic) causes, inflation also increases or decreases due to structural factors. For example, inflation has not only been slowed over the past 15 years by low interest rates, but also by structural factors such as globalization and an aging population. This decelerating trend has reversed. We observe five structural factors that are really driving up inflation. These factors are:

◉ Demography,
◉ Decarbonisation,
◉ Deglobalisation,
◉ Debt
◉ Digitalisation.

The effects are gradual, but from year to year, they drive up inflation. This could represent a percentage point per year.

We see that the supply of labour is decreasing (demographics). This increases wage pressure. Measures to reduce CO² emissions (decarbonisation) also lead to higher costs. Due to the problems in supply chains at the international level, we notice that companies are looking for solutions closer to home (de-globalization). This is also a source of higher costs. Furthermore, we expect companies to increase their pricing power through smart use of data (digitalization), which in turn will drive price increases. Finally, the increase in debt also has an inflationary effect. Currency depreciation can encourage businesses and individuals to take on more debt. An undesirable effect that central banks will fight with higher interest rates.
The effect of all these inflationary tendencies can be influenced by political and economic developments. For example, the decline in the working population can be compensated by countermeasures. Governments can encourage full-time work at the expense of part-time work. For all the factors stated above, it is possible to envisage developments likely to reinforce or reduce the inflationary effect. Take Deglobalisation as an example, and especially decoupling with China, which strongly depends on geopolitical circumstances. But we don't see inflation falling back to 2% in 2025.

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