Recompense
At this rate, the Weimar jokes may be out of fashion by the end of 2023.
German inflation decelerated more than expected in December, data out Tuesday showed, but there were caveats aplenty.
As the release noted, a "one-off federal payment to cover monthly gas and heat had a downward effect on prices." It wasn't immediately possible to quantify that effect (Tuesday's data was preliminary), but as ING's Carsten Brzeski noted, "for the time being, it is lower energy prices and hence base effects
That energy prices (and inflation more generally) depend on the war is a point that’s made with regularity, both here and elsewhere.
What do we expect to happen to energy prices should the war end tomorrow? Do we expect Russia to offer gas to Europe again? Do we expect Europe to take it if they do?
Oil would seemingly be unaffected as Russian volumes are essentially unchanged vs prewar and EU/US sanctions (including the price cap) have done everything they can to keep oil flowing.
What else is there, coal?
On the flip side, an end to the war would seem to indicate a vast effort to rebuild Ukraine. The material and labor required for that would seem to be inflationary…
So inflation in Europe is likely to come down in 2023 thanks in the most part to declining energy prices as the worst-case winter hasn’t turned out to be the case. But Lagarde is erring on the hawkish side, likely so she can take some credit on taking down the inflation dragon on the way to reclaiming the lost creditability. A steadfastly hawkish ECB would also likely support the Euro against a weakening USD on a less hawkish Fed, which is dialing down hikes. Seen in that light I can see why Lagarde was and will be as adamant as she can be on additional ECB hikes, regardless of whether she can actually deliver on those 50bps increments. She wants to take back the lost creditability as well as the losses the Euro suffered against the greenback last year.