According to Eurostat’s flash estimate released this morning, HICP inflation came in at 0.4% in July, plunging to its lowest level since October 2009. The fall of energy prices was the main factor behind this deceleration. Inflation should remain well below 1% over the coming quarters.
Inflation eased in July. According to Eurostat’s flash estimate released this morning, HICP inflation came in at 0.4% down from 0.5% of June, plunging to its lowest level since October 2009. Available data show that the July deceleration was essentially due to energy prices which fell by 1% on yearly comparison, deducting alone 0.1pp from the change the inflation rate. Food inflation came also rather weak, while services and non-energy industrial good inflation rates where rather stable, leaving core inflation at 0.8% y/y. The weakness was widespread among the largest economies of the area, with inflation decelerating to 0.8% in Germany, to 0% in Italy, passing into negative territory in Spain.
Inflation is likely to remain at very low levels and well below 1% for a while. A combination of large spare capacities and weak activity is weighing on price dynamics in both core and peripheral countries. The unemployment rate was 11.5% in June (also released today). Despite declining, it is still not so far from its highest rate of 12% recorded just some months ago. This suggests that the pace of the recovery is still too weak to reduce excess capacities in the economy. Under these conditions wage growth should remain moderate. Against a backdrop of very moderate domestic price pressures, services inflation (40% of the headline index, the highest weight) should remain subdued. By contrast, energy and food prices might slightly increase over the remaining quarters of the year, benefiting from positive base effects. We expect inflation to average around around 0.5% and 0.6% in Q3 2014 and Q4 2014, respectively. For the whole year inflation should be 0.6% and just slightly above 1% in 2015, that is well below the ECB inflation target for price stability.
Although price and credit dynamics are subdued (credit growth to the private sector kept on contracting at relatively high pace in June), the ECB will not embark on further actions any time soon and definitely not before having a better idea of the effects on the economy of the TLTROs (the next ECB meeting on August the 7th). The first two TLTROs will be conducted in the second half of the year.
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