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“Eurozone CPI components are keeping the ECB on alert”

Sep 19, 2024

Redacción Mapfre

Redacción Mapfre

Eurozone inflation is gradually approaching the target level, but the road ahead could be bumpier than initially expected. The CPI for August came in at 2.2%, four-tenths less than July, due mostly to a softening in the rise in energy prices. However, as always, the devil is in the details and Alberto Matellán, chief economist at MAPFRE Inversión, warns that drilling down on the components reveals a different story.

“The fall of four-tenths is due to energy, which is a much more volatile component, while services remain well above desired levels and so give the ECB little to no reason to relax,” he points out, adding that the situation for central bankers right now is especially uncomfortable because “the data means their hands are tied.”

However, and in spite of this inequality in the components, the European Central Bank (ECB) made the decision to lower interest rates by another 25 basis points at its September meeting, to 3.5%. And it might not be the only cut on the cards.

The ECB could have room to make some additional cuts between now and the end of the year. So far, growth has been acceptable, inflation more benign and wage increases are less of a concern, but it will still need to see evidence that we’re headed in the right direction,” highlights Eduardo García Castro, senior economist at MAPFRE Economics.

The Bank of Spain's forecasts for the Spanish economy have also been revised, with the growth outlook for 2024 up by half a percentage point to 2.8%, while 2025 GDP is now projected to come in at 2.2%, three-tenths better than previously, and the 2025 forecast has been revised upwards by two-tenths of a point to 1.9%. MAPFRE Inversión's chief economist points out that these analyses always arrive with a certain delay and that the consensus now expects growth to be even somewhat higher than 2.8% in 2024.

This positive tone has also extended to the markets, with the IBEX 35 at its highest levels since 2015. Matellán believes that there are reasons for optimism. “There are multiple reasons supporting the rise we’ve seen in the IBEX, such as rate cuts or growth and inflation expectations, at least in the short term,” he says. However, he reminds us of the importance of being selective in terms of stock picking. “There are always opportunities out there if we’re selective with our stocks. That’s why active management is so important,” he stresses.

How to invest with the stock market at maximums?

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We are facing a high price scenario, in which questions for investors arise: Should one enter a market that is already “expensive,” or wait? Should you hold your investments, or is it time to sell? MAPFRE experts explain that being in a moment when stock markets are at record highs should not deter investment if we have a long-term outlook—the most suitable for retail investors—and good diversification.

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The U.S. Federal Reserve has dominated much of the economic and financial discussion in recent weeks, largely due to the debate over possible rate cuts, which were confirmed last week. On Tuesday, Chair Jerome Powell again drew attention by referring in a speech to the “fairly high” prices in U.S. equities. With Wall Street at historic highs, the question arises whether we are dealing with an equity bubble.

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