Euro Zone: Inflation down in September

Inflation eased to 0.3% in September. The drag came from core and energy inflation, while food inflation accelerated. Going forwards headline inflation should remain close to its cyclical low in the short-run before gathering some pace next year. On average we expect inflation at 0.5% this year and below 1% next year.

Inflation eased to a new cyclical low in September. According to Eurostat flash estimates it was 0.3%, down by 0.1pp with respect to the previous month. The drag came from core and energy inflation, while food inflation accelerated.
The breakdown of core inflation shows that both services and non-energy industrial goods (NEIG) eased in September. The slowdown of the former probably reflected the weakness of domestic activity, as it is mainly related to domestic factors such as wages and output gap. The amount of slack in the economy is still large. International organizations currently estimate the output gap at around 3%. Given the poor state of the economy, it is projected to narrow at a very gradual pace over the forecast horizon. On the same line, the unemployment rate is still high and projected to decline only moderately. In August it was stable at 11.5% (released today as well), not so far from its record high of 12% recorded one year earlier. Against this backdrop domestic prices pressures (from wages and firms’ output prices) will remain extremely limited if not absent. Services inflation should ease or remain broadly stable in the short run, before gradually recovering in 2015.
Although NEIG inflation eased in September, it is expected to recover and gather some momentum going forwards, reflecting a weaker euro and higher import prices. Taking all these elements together core inflation is projected to remain subdued over the coming months, before gently accelerating thereafter. The profile of headline inflation is more volatile due to the dynamics of energy and food inflation. After, falling over the previous three quarters, energy inflation is expected to accelerate in Q4, a development likely to gain momentum in 2015. Food inflation is also forecast to recover going forwards, after geopolitical tensions weighed significantly on its dynamics this summer. Against this backdrop, headline inflation should remain close to its cyclical low in the short-run, and smoothly increase going forwards. On average we expect inflation to be around 0.5% this year and to remain below 1% next year.

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