EZ HICP Preview (Oct 31): Headline Up But Still Below Target and Backed Up By Softer Wages?
Lower energy costs were the main factor behind the sharp fall in HICP inflation, which fell from 2.2% y/y in August to 1.7%, the latter revised down a notch from the flash estimate. This is the first sub-target reading since June 2021. Services inflation also edged lower, this allowing the core rate to fall 0.1 ppt to 2.7% a six-month low. We see energy-related base effects and m/m rise in fuel prices taking the headline back up to 1.9% in October but with the core falling a further 0.1 ppt (Figure 1) as may services inflation. Regardless, shorter-term price momentum data (ie adjusted m/m data) already suggest that core inflation on this basis is running around target (Figure 2) and given sharp, falls in wage tracker data, services inflation may succumb more clearly soon (Figure 3). This backdrop has persuaded the recalcitrant ECB into a reassessment. In fact, the ECB has brought forward inflation hitting target durably now to be in the course of next year as opposed to late 2025 as suggested in the September projections.
Figure 1: Headline Stays Below Target – For Now?
Source: Eurostat, CE, % chg y/y
Below target inflation may yet be short-lived given adverse base effects later this year before a more sustained fall below 2% occurs through 2025. But for us, and seemingly now the ECB, recent survey data, rather than just inflation, may be increasingly influential. Such data are pointing not only to more real economy weakness but also to significant falls in cost and output price pressures and retailers price expectations. These considerations are all the more important as the ECB hierarchy has made clear policy will be shaped by an array of data rather than any particular data points!
Admittedly, the drop in August and September HICP inflation was be very much energy biased, this partly explaining what seems to be somewhat resilient core inflation measures, but this seems to be dissipating on a more short-term basis (Figure 2). Indeed, we see y/y services dipping further below 4% in this October release.
Figure 2: Core Inflation Near Target Too?
Source: Eurostat, European Commission
This services rate though is still well below that seen in many other DM environments and in August was probably boosted by the impact that the Olympics had in France, implying some softening back down hereafter. Even so, while headline inflation may slip to/below 2%, it may perk back towards 2.5% by end-year due to energy base effects. The ECB hawks on the Council will point to still apparently resilient services inflation, but where the doves may counter by pointing to what is a much earlier than expected drop below target as well as recent much softer wage inflation news, most recently in terms of a sharp drop in the monthly Indeed Wage tracker (at 3.1% is the lowest since early 2022), something that augurs well for lower services inflation in due course (Figure 3).
Figure 3: Wage Pressures Easing Clearly?
Source: Eurostat, ECB, % chg y/y
Perhaps the last mile for inflation is not the hardest, after all, for middle distance runners and most other experienced athletes the last mile is often the quickest as it sees a sprint finish! Maybe this will be belatedly acknowledged by the ECB with both President Lagarde And Chief Economist Lane due to speak in Washington latter today.