Risks to the inflation forecast

8th Situation Report 2024

Observed inflation was slightly below the forecast in Q4, as somewhat faster growth in administered prices was offset by slightly weaker growth in prices of food, beverages and tobacco and a slightly larger decrease in fuel prices. Core inflation was also slightly lower than forecasted. The inflation forecast for next year has been revised slightly downwards due to the delay in approving the increase in the licence fees for public-service television and radio and a more moderate increase in the administered component of electricity prices. Taking into account all other new data and information, the update of the inflation outlook leads to slightly slower inflation next year than in the autumn forecast. Consistent with the autumn forecast was a continued decline in short-term market interest rates initially, followed by broadly stable rates from mid-2025 onwards. The updated interest rate outlook is broadly in line with the autumn forecast.

Beyond these simulations, the Monetary Department’s economists perceive the following risks and uncertainties. Higher inertia in services inflation, which may be the materialisation of the continuing increase in inflation expectations due to faster price growth in the months ahead, is an upside risk to inflation. Further increases in global prices of food and agricultural commodities are a risk in the same direction. Faster price growth on the property market is also an upside risk. There is also an upside risk associated with possible prolonged elevated wage growth in the domestic economy and wide general government deficits. By contrast, a further deterioration in economic activity in the euro area and a related faster decline in ECB rates is the dominant downside risk to inflation. An uncertainty relates to the possible introduction of, or increase in, tariffs on European exports to the USA. Geopolitical tensions related to the ongoing war in Ukraine and the conflicts in the Middle East remain a general uncertainty of the forecast. Overall, the Monetary Department’s economists assess the risks of the updated outlook as slightly inflationary.