Eurozone: Inflation figures give ammunition to the ECB hawks - ING

Peter Vanden Houte, Chief Economist at ING, notes that Eurozone’s preliminary figures for both headline and core inflation came out higher than expected in August. However, it would be a stretch to see a strong upward trend as inflation might even fall back again at the start of 2018, he further adds.

Key Quotes

“After June’s drop, the Eurozone unemployment rate stabilized at 9.1% in July. In the light of the current taper debate it is no surprise that markets rather focused on the preliminary inflation figures for August. Headline inflation actually rose to 1.5% in August, from 1.3% in July. This was slightly above the consensus estimate (1.4%), while core inflation remained stable at 1.3% (consensus at 1.2%).”

“The energy inflation increased to 4.0% from 2.2% in July, but this was largely due to a temporary drop in oil prices in August 2016. With crude oil prices likely to continue hovering around 50$/bbl and taking on board the stronger euro, the energy component is unlikely to add something to inflation in the second half of this year and will even push inflation lower in the first half of 2018. Looking at price trends in food commodities, food price inflation is also unlikely to have much of an upward impact on inflation. This implies that headline inflation will remain close or even below core inflation for some time to come.”

“To be sure, core inflation has definitely troughed, but it would be a stretch to expect a strong upward trend. Even though surveys signal slowly rising pricing power amongst European businesses, wage pressures have remained largely absent until now. In that regard we believe that core inflation will hover around 1.5% throughout 2018, while headline inflation could be even slightly lower next year.”

“The hawks within the Governing Council will argue that deflationary pressures have now clearly disappeared. But given the risk that an overshoot of the euro exchange rate could push inflation back below 1.5%, caution remains warranted in removing monetary policy accommodation. We believe that the ECB will announce a “dovish tapering” in October, giving the markets the impression that QE could be lengthened into the second half of next year, if need be. At the same time we think that a deposit rate hike is not to be expected before the end of 2018.”