Inflation forecast 2.3% for 2024 and 2.6% for 2025 (2024)

Created on 07.08.2024

Luxembourg's inflation rate continues to slow down. STATEC is maintaining its inflation forecast for this year at 2.3%, with the next wage indexation due in the last quarter of 2024. The partial lifting of the tariff shields at the turn of the year 2025 would limit the rise in electricity prices. STATEC has therefore lowered its inflation forecast for 2025 to 2.6%, with indexation scheduled for the fourth quarter of 2025.

In July 2024, annual inflation in Luxembourg stood at just 2.0%, a level not seen since the beginning of 2021. This decline is the result of the fall in core inflation[1] (2.0% in July compared with 4.9% a year ago), coupled with a slowdown in the price of petroleum products (+1.3% year-on-year in July compared with +4.2% in May). Moreover, the inflation observed over the recent period is close to that anticipated in the forecasts published in May 2024.

_{Source: STATEC (prévisions du 07/08/2024)}

_{Note:The contribution from underlying inflation is defined as the difference between the NICP and the contributions from electricity and petroleum products.}

The ongoing slowdown in core inflation was helped by the slower rise in food prices and a fall in the prices of non-energy industrial goods (-0.1% year-on-year in July). Food inflation (+1.5% year-on-year) made only a small contribution to overall inflation in July (+0.2 percentage points, compared with +1.3 percentage points a year earlier). Service prices, meanwhile, have been slowing for the past 2 months, rising by 3.5% year-on-year in July (compared with 4.0% in May). This mainly reflects the end of the impact of indexation in February and April 2023. In fact, only the indexation in September 2023 still has an impact on annual inflation in July.

In the eurozone, on the other hand, inflation is stagnating. It has hovered around 2.5% since February, reaching 2.6% in July. Services inflation fell slightly to 4% in July (vs. +4.1% in June and May), while food inflation was 2.3% (vs. +2.4% in June and +2.6% in May).

By 2025, inflation should be close to 2% in the eurozone...

The main international institutions expect inflation in the eurozone to exceed 2% in 2024 and 2025. For 2024, forecasts range from 2.3% (Oxford Economics) to 2.5% (European Commission and ECB). For 2025, inflation is forecast at between 1.4% (Oxford Economics) and 2.2% (ECB and OECD).

The new projections from Oxford Economics (OE), used in STATEC's inflation forecasting model, anticipate a slower decline in consumer prices in the eurozone compared with previous forecasts. This is the result of more sustained momentum in food inflation and energy prices in 2024. The latest OE forecasts revise the assumptions for the price of oil in 2024 and 2025 very slightly upwards to USD 83 and USD 78/barrel respectively. The euro/dollar exchange rate has been revised down to USD/EUR 1.08 in 2024 and 2025 (from USD/EUR 1.09 and 1.10 respectively). OE has thus revised its inflation forecast for the eurozone to 2.3% in 2024 and 1.4% in 2025 (compared with 2.1% and 1.3% respectively previously). The prices of imported goods, on the other hand, have been revised downwards.

...and 2.6% in Luxembourg following the partial dismantling of the energy price shield

To avoid an inflationary shock resulting from the lifting of the tariff shields at the turn of the year 2025, the government has announced the partial removal of the energy price cap measures. Inflation forecasts now include a limit of 30% on the rise in electricity prices in 2025 (i.e. half of the 60% increase expected in the absence of additional measures), and thus diverge from the unchanged-policy forecast published by STATEC at the beginning of May[2]. Gas prices, for their part, are set to rise by 14%, due to the end of the State's assumption of network costs. This forecast is a direct result of price trends on derivative markets and the way in which energy suppliers in Luxembourg are supplied[3]. It goes without saying that market price expectations are volatile and that the resulting forecasts for 2025 should be treated with caution[4].

Reflecting a trend in prices observed over the last few months in line with that outlined in previous forecasts, STATEC is maintaining its inflation forecast for this year at 2.3%. Next year, inflation has been revised down to 2.6% (from 3.1% previously), taking into account the partial lifting of electricity price shields. Underlying inflation, which includes electricity, is maintained at 2.6% in 2024 and revised downwards to 2.4% in 2025 (compared with 3.0% previously). According to the inflation forecasts in the central scenario, indexation would still take place in Q4 2024, to which a new index tranche would be added in Q4 2025 (i.e. one quarter later than with a full lifting of the tariff shields assumed in the May forecasts).

Source: STATEC (forecasts as at 07/08/2024)

* These forecasts include an increase in the CO2 tax of EUR 5/tCO2 in 2025.

** Average prices including VAT for a residential customer in Luxembourg with an annual consumption of 2,426 m3 of gas and 4,191 kWh of electricity. Based on the assumptions of the Directorate General for Energy of the Ministry of the Economy, these prices are calculated assuming i) for gas: network usage tariffs would increase by 6% in 2025; ii) for electricity: the contribution to the compensation mechanism would increase to -2.7 cents EUR/kWh from 2025 (i.e. the value required to force the increase in the price of electricity to 30%) and network usage tariffs would increase by 15%.

Two alternative scenarios are based on historical deviations in electricity and gas tariffs and the price of Brent crude oil (the latter being reflected in the price of diesel, petrol and heating oil). Taking into account the measures in place, the high and low scenarios for electricity and gas are only considered for the year 2025. The high scenario assumes that, in 2025, gas, electricity and Brent crude will rise by 31%, 30% and 23% respectively. The low scenario anticipates the same rise in the price of electricity (+30%), a smaller increase in the price of gas (+5%) and a fall in the price of Brent crude (-25%) in 2025.

In the low scenario, the next indexation will only take place in the 2nd quarter of 2025. The high scenario anticipates indexation in the 4th quarter of 2024, followed by further indexation in the 2nd quarter of 2025.

[1] Underlying inflation is a sub-series of the general index (NICP) which excludes oil prices and other prices formed on international markets.

[2] The inflation forecasts published in June in Economic Outlook 1-2024 already included this limitation on the rise in electricity prices.

[3] See Chapter 7.2 of Note de Conjoncture 1-23.

[4] The uncertainties surrounding the price of gas are greater because of the structure of the market: most purchases are made only a few months before the delivery date. Consequently, the forecasts are based mainly on market expectations (as at July 2024) for the year 2025. For electricity, on the other hand, a large proportion of the energy that will be supplied in 2025 has already been purchased during 2022 and 2023 at the market price prevailing at that time. These advance purchases provide a relatively clear view of the electricity tariffs that will be charged in 2025.

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This publication was edited by Gabriel Gomes and Jil Schaul.
STATEC would like to thank all the contributors to this publication.