EZ HICP Review: Disinflation Stalls?
It could be argued that the EZ disinflation process has stalled given that no further drop beyond that to 2.4% in April has occurred. Indeed, somewhat unexpected, headline HICP inflation rose a notch to 2.6% in the July flash, reversing the slide seen in June. This is even the case regarding the core rate which stayed at 2.9%, thereby still 0.2 ppt above the April low, with services inflation still showing apparent resilience after slipping a mere notch to 4.0% (Figure 1). But we see abundant signs of the disinflation process in survey data (Figure 2) and with the ECB’s own measures of persistent inflation pointing very much to already below target inflation. These considerations are all the more important as the ECB hierarchy have made clear that policy will be shaped by an array of data rather than particular data points!
Figure 1: Headline and Core Falls Further?
Source: Eurostat, CE
The July rise in the headline was seemingly driven by a small rise in fuel costs, but this already seems to be unwinding given the fall back in oil prices. It was partly offset by slightly lower food inflation. Services inflation edged down, but there are more promising signs in survey data suggesting that this resilience will soon buckle.
Figure 2: Surveys Suggest Services Resilience to Diminish?
Source: Eurostat, European Commission
As a result, we still see headline and core inflation dipping but possible not to below target in coming month, but with the former very near 2% in September before base effects take it higher by year-end. clear expansionary stance.