After German and Spanish data yesterday, the fall in Euro-area inflation to 0.4% y/y was no surprise. Inflation has not been lower since October 2009 when it was actually negative because of the oil price slump during the Great Recession.
In July, energy prices slightly fell over the month while they increased markedly in July 2013. So there is a base effect in todays headline print pushing the rate lower. A lower energy bill is good news for Euro area consumers – “you can buy more stuff”, to quote Mario Draghi.
We got some indications that the downside pressure on core prices did not increase: The core rate (ex food, energy, alcohol, tobacco) remained unchanged at 0.8% y/y. The ex-energy rate rose a tad to 0.6% from 0.5%. The rate of inflation in services – heavily influenced by wage trends – remained unchanged at 1.3% y/y.
While in the ECB they will not like the low inflation print, it will probably not make much difference for next week’s policy meeting. For several reasons the threshold for new measures is fairly high at the moment. Core inflation is very low but not lower than at the start of the year. The effects of the significant easing package from early June still have to be assessed. Moreover, the ECB can take comfort from the recent weakening of the EUR that – if it continues – should contribute to a pick-up of inflation later this year.
Nordea