Inflation Expected to Fall in Coming Years, Relieving Pressure on Businesses — Eventually

In the short-term, inflation is here to stay.

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Inflation in the Euro zone hit an all-time high in December, coming in at 5 percent for the month. That beat the previous record, which was set when the rate hit 4.9 percent the prior month. It has been trending upward for many weeks.

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Still, officials are optimistic this is a one-time issue that will be rectified in the coming years. The European Central Bank expects the rate to be under 2 percent in 2023 and 2024. ECB Vice President Luis de Guindos said at a recent UBS event, "Inflation is not going to be as transitory as forecast only some months ago. The assessment of risk for inflation is moderately tilted to the upside over the next 12 months."

He specifically mentioned energy prices, which he said are likely to remain up, and supply chain issues that will also continue to impact pricing for now. 

In an end-of-year forecast for 2022, Capital Economics’ senior global economist Simon MacAdam explained that three key themes will dominate the year’s inflation outlook: Headline rates are expected to fall; product shortages and increased shipping costs will continue to place upward pressure on good inflation into the second half of 2022 and the Omicron variant could further disrupt supply chains and regular business; and, finally, the U.S. will face higher price pressures than other advanced economies. 

“In general, we expect inflation to be higher than other forecasters next year. By 2023, most of the factors dragging on headline rates will have run their course, and goods inflation should ease as shortages improve,” he said. 

For businesses in Europe, this can be read as good news in the long-term. Consider cutting costs in the short-term. The Harvard Business Review looked at 5,700 global companies last year and issued the conclusion that while companies deal with inflation “by devoting more energy to adjusting prices or finding new sources of growth,” cutting costs is important, too.

Find more tips on navigating times of inflation here and hold tight until 2022.