Inflation: The fall in inflation continues slowly  

Thought to have disappeared after a decade of lull, it appeared unexpectedly at the beginning of 2022, taking almost everyone by surprise. But what about today? Has it subsided, or has it grown stronger?

Inflation remains tenacious, but a fall is expected.

Within the Euro area, headline inflation reached 7% year-on-year in April, while core inflation fell to 5.6%. These figures are not likely to convince the ECB that inflation is under control. Despite this, downward pressure on inflation in the manufacturing sector will continue to build: expectations of selling prices have reached their lowest level since April 2021. Although they remain high in the services sector, they have nonetheless fallen for the last three consecutive months. We may have to wait until the second half of the year to see a significant fall in inflation in service prices. All in all, we can expect the downward trend in inflation to continue, although core inflation should still hover around 5% in the second quarter.

The vigorous monetary transmission is reflected in the fall in the number of loans.  

The dynamics of core inflation is one of the three key factors that will influence monetary policy, according to ECB President Christine Lagarde. She maintains that the ECB cannot rest on its laurels. The forecasts still point to inflation remaining "too high for too long". It is also clear that the money transmission mechanism is operating at full capacity. Banks have tightened their lending criteria as never before since the financial crisis, and demand for credit in the first quarter was below expectations, according to the bank lending survey. A further 25 basis point rise in rates in June seems very likely, with even a possible final 25 basis point rise in July. In any case, a long period of stability should follow from the second half of the year: the first cut in ECB rates is not now expected until the second quarter of 2024.

Persistent inflation is calling rate cuts into question and putting upward pressure on market rates.

Market rates remain under scrutiny and are influenced by a number of key factors, including inflation. Although this is nothing new, the crucial question is to what extent inflation has become persistent. While the peak is behind us, it seems that inflation is not falling as quickly as expected. As a result, we do not expect any rate cuts from the ECB for a few months yet. Market rates are also impacted, as the objective of seeing them fall significantly over the longer term is thwarted by the fact that they remain deeply negative in real terms, and also lower than short-term rates.

How to protect yourself from inflation?

Inflation, especially when it spikes is never good news for your portfolio. Even if a package of measures has been decided by the Luxembourg government and social partners to mitigate the effects of soaring prices, the fact remains that your purchasing power could be affected especially when inflation persists. Your savings also suffer. As its return is lower than the rate of inflation, the capital is gradually being eaten away and you are losing money. The amount remains the same, but not its real value.

So what should be done to counteract the negative effects of inflation? If you have been putting all your eggs in one basket, which is mainly savings products, it might be time to diversify your portfolio and switch to investment products. Of course, there is always a risk of capital loss, but some investments are riskier than others. It will depend on your risk appetite and your investor profile. If you have already invested for the long term, don't react abruptly. Keep a cool head and your investment objectives in mind. In times of crisis, it is never wise to change the direction of your investments. Not only is it too late, but you risk missing out on any financial rebounds once the crisis is over.

Managing financial assets in such a difficult period is not easy. The best thing to do is to talk to your banker to find out together what needs to be done based on your personal situation.


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