Special Focus Report: Inflation reached an inflection point

Greece’s CPI inflation has slowed to 9.1% in October, from 12.0% in September, as energy and international commodity prices come off their highs, providing early signs that the inflation shock may have begun to reverse.

▪ Moreover, inflation dropped in October-November below that of the euro area for the first time since December 2021, reflecting Greece’s relatively higher energy intensity and dependence on imported energy resources. This dependence had led to a stronger inflation impact from the global energy shock in previous months but is now resulting in a speedier decline.

▪ There are clear signs of the impact from slowing commodity prices. The slowdown in headline inflation, in October, is attributed mainly to declining natural gas prices. Specifically, the fuel component of CPI decreased by 13.1% m-o-m in October (with y-o-y growth slowing to +23.3% from 52.5% in September), contributing +2.3 pps in October’s CPI growth from 4.9 pps in September.

▪ Increased State subsidies have helped break the link between natural gas and retail electricity prices (increase in electricity prices for households of 7.4% y-o-y in October from 30.5% in September, and an average of 64.0% in 9M:2022), with the contribution of the respective CPI component dropping to 0.3 pps in October, from 1.2 pps in September.

▪ Food and non-alcoholic beverage prices have remained on a steep upward trajectory throughout 2022, increasing by 14.8% y-o-y in October, from 13.5% y-o-y in September, having the largest inflationary impact among all other non-energy CPI components. However, international food prices are recently also showing clear signs of decline, though they have a slower pass-through to final goods inflation than energy prices.

▪ Despite the improvement in the headline rate, core inflation (excluding energy, food, and beverages) has continued its upward trend rising to 5.2% in October, pointing to strong spillover effects across the production/supply chain, which will reverse with longer time lags.

▪ Looking forward, recent market-based forecasts of energy prices suggest a further slowing of energy-related inflation in 2023. Specifically, crude oil prices are expected to drop by c. 13% y-o-y and natural gas prices to increase by only 3% y-o-y. Thus, energy is expected to subtract c. 1 pp from average CPI growth in 2023 compared with a positive contribution of +5.4 pps in 2022.

▪ In addition, key agricultural and industrial commodity prices are expected to continue to decelerate in the following year and lower the contribution of food in 2023 inflation to 1.5 pps, on average, from an estimated 2.3 pps in 2022.

▪ All in all, the above trends lead to an updated NBG forecast of Greece’s CPI inflation for end-2022 and end-2023 to 7.7% and 3.2% y-o-y, respectively, with the corresponding core inflation measure (excluding food, beverages, and energy) at 5.5% y-o-y in end-2022 and 4.5% in end-2023, with key risks tilted to the downside.

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