EZ HICP Preview (Oct 1): Headline Inflation to Edges Higher as Services Slows to Fresh Cycle-low
As we have underlined of late, HICP inflation – at target for the last three months – is very much a side issue for the ECB at present, offset instead by moderate concerns whether the apparent resilience of the real economy may yet falter. This mindset will not be altered by the flash HICP data for September even given the expected 0.1 ppt rise in the headline to 2.1% (Figure 1), not least as this still implies that the ECB’s Q3 projection for both the overall and core figures could be undershot. This rise in the headline will again be food and energy base effect driven with services and the core both seen slowing a notch to a new cycle low below 3%, something already evident in adjusted m/m data (Figure 2).
Figure 1: Headline to Edge Above Target as Core and Services Hit Cycle-Low?
Source: Eurostat, CE
Indeed, services inflation, at 3.1%, is now the lowest since March 2022 and does seem to be belatedly following in the footsteps of lower wage pressures. As a result, this trend and noise could bring the headline and core rate could both dip below 2% in Q4 with base effects pulling the headline down toward 1.5% in Q1, especially if demand weakness starts to accentuate what have largely been supply factors driving the disinflation process hitherto. However, the risk is of a (short-lived) 0.1 ppt rise in the headline is a distinct likelihood for September numbers, albeit again very much energy base effect (and perhaps food) driven. Regardless, as recent calendar distortions unwind, what has looked like fresh price pressures in seasonally adjusted short-term m/m movements for core and services have reversed and are consistent with on-target inflation (Figure 2)!
Figure 2: Core and Services Inflation Around Target in Shorter-Term Dynamics?
Source: Eurostat, ECB, CE