The only scenario in which the ECB would be right in its inflation assumption: A collapse in corporate profit margins

When we analyse the ECB's December 2023 forecasts, we see: A continued low unemployment rate (6.6% in 2024 compared with 6.5% in 2023 ); As a result, continued strong growth in per capita wages (4.6% in 2024 compared with 5.3% in 2023 ); Low productivity gains (0.4% in 2024 versus -0.8% in 2023), which is perhaps a little optimistic in a year of weak growth; Unit labour costs up 4.1% in 2024 (compared with 6.1% in 2023 ); An increase in the GDP deflator of 2.9% in 2024 compared with 5.6% in 2023; Inflation excluding energy and food falling from 5% in 2023 to 2.7% in 2024. We see that the very strong assumption made by the ECB, which explains the decline in inflation excluding energy and food, is a collapse in profit margins, since the GDP deflator, which has risen by 0. 7 percentage point less than unit labour costs, is assumed by the ECB to rise by 1.2 percentage point less than unit labour costs in 2024. If the fall in profit margins were assumed to be identical in 2024 to their fall in 2023, the GDP deflator would rise by 3.6% in 2024 and inflation excluding energy and unprocessed food would be 3.4%. If, moreover, we assume that productivity gains remain stable, rather than recovering, inflation excluding energy and unprocessed food will remain at 3.8% in 2024 in the euro zone and the GDP deflator will rise by 4%.