Much too low for comfort, now hoping for base effects to materialise
Mainly driven by lower energy prices, Euro-area consumer prices fell by 0.255% over the year in September, rounded to -0.3%. Surpringsingly, the core rate (ex energy, food, alcohol, tobacco) fell too, to 0.7 (0.68)% from 0.9%, the lowest reading since last March.
Euro-area economist have called the inflation trough too often to be entirely credible. This time, chances to be right are not too bad. Base effects from food and, more importantly, energy should lift the inflation rate in Q4. We expect the headline rate to rise to 0.5 to 0.6% y/y in October and forcast an average of 0.6 to 0.7% y/y for Q4 as a whole. Over the medium term, recent and future EUR weakness should contribute to a gradual increase in the inflation rate. See our EUR/USD outlook here.
The problem with base effects is, that they don’t happen if prices decline in the current year as much as they did last year. However, a heavy drop in oil/energy prices is not what we expect for Q4. Should it happen, the Euro area’s energy bill declines which would be a could thing among all the complaints about “too low inflation”.
Today’s inflation numbers should not increase the sense of urgency in the ECB. For Thursday, we expect more details on the ABS and covered bond purchase programmes but no full clarity about size and time horizon. The door will be open to whatever further it takes, which will allow the market to continue to price in further easing. Sovereign QE is not our base case.
Today’s other data data were mixed: The unemployment rate in the Euro area remained stable at 11.5% as expected, ranging from 4.7% in Austria to 27% in Greece. Germany reported a strong increase in retail sales. In August, sales increased by 2.5% m/m in real terms, following a decline by 1.1% m/m in July. So far, retail sales in Q3 are up 0.8% over Q2. All in all, available hard data point towards a small increase in GDP in Q3. Umemployment in Germany rose a bit in September while at the same time, employment continued to rise. The qualification mismatch between unemployed people looking for jobs and companies trying to fill vacancies is increasing.
Nordea