Eurozone: Dropping core inflation rate adds to ECB worries - ING

Bert Colijn, Senior Economist at ING, notes that the Eurozone inflation rate stalls at 0.2% and core inflation drops to 0.8%, no doubt alarming the ECB governing council ahead of next week’s meeting.

Key Quotes

“The Eurozone inflation rate was stable at 0.2% in August, lower than analysts had expected. The core inflation rate even dropped from 0.9% to 0.8%, indicating that the inflation rate in the Eurozone is stuck in neutral as the oil price effect is fading out of the data. This should at the very least put upward pressure on the headline rate, but with disappointing price growth in services, inflation is staying put for the moment.

With nominal wage growth still weak, it is difficult to see core inflation move anywhere near the “just under 2%” target of the ECB. Wage pressures are unlikely to emerge in the coming months as unemployment is still elevated. Today’s release of the July the unemployment rate, which was stable at 10.1%, confirms that significant wage pressure is unlikely to return at least before the end of the year, as this still leaves unemployment well above its natural rate for the moment.

Businesses are also still fighting for volumes, which results in continued low prices. But now that producer prices have been rising in the past months, the question remains how long businesses can continue to pass on low production prices to the consumer. Yesterday’s Economic Sentiment Indicator for the Eurozone revealed that businesses are not worried about rising production prices as of yet though as they indicated to be expecting further price declines over the coming months.

It is unlikely that the ECB will act on the drop in core inflation at its meeting next week. Next week’s meeting of the governing council will focus mostly on the staff projections that have been made earlier and we therefore expect that no further easing will be announced, except for perhaps a drop of the deposit rate floor of the government bond purchases. The fact that core inflation is now lower than it was a year ago will be alarming to ECB governing council members though, especially as economic activity seems to be slowing further in the third quarter on political and economic uncertainty.”