Euro zone Inflation Dashboard

In this flash report, we present an overview of several, more detailed, inflation graphs. We will regularly provide an update as they might help in deciding whether the euro area is heading for a prolonged period of too low inflation or even deflation.

EMU inflation remains stubbornly low

The ECB announced in June a broad arrange of measures in an attempt to bring inflation again in line with the target in a medium‐term perspective. Persistently low inflation however keeps speculation on further ECB action, namely an outright QE programme, alive.

Euro zone HICP inflation remains stubbornly low and well below the ECB’s target of inflation below but close to 2%. In June, the annual rate of HICP inflation remained unchanged at 0.5% Y/Y. While core inflation unexpectedly edged up from 0.7% Y/Y to 0.8% Y/Y, it continues to hover around the record lows. Besides core inflation, it is also interesting to look at the CPI rate at constant taxes, which is even below the headline rate as inflation is still boosted somewhat by tax increases. Excluding those tax increases, inflation is at 0.3% Y/Y. Also interesting is to take look at the goods versus services inflation, which clearly shows that downward prices pressures are led by the more international‐oriented goods sector. Sluggish global growth, which keeps commodity prices relatively low, is at least partially a factor. Inflation in the more domestically oriented services sector, on the contrary, remains moderate, and there are signs that inflation is stabilising as domestic demand in the euro area is slowly recovering.

National inflation data continue to show significant deviations between countries. Negative inflation rates are still observed in the hard‐hit peripheral countries as Greece and Portugal, which is part of a rebalancing process to gain competitiveness and is a such inevitable. The pace of contraction is slowing somewhat in recent months. Also in core countries however, inflation remains very low, even in Germany, where the economy is close to full employment. Calls are nevertheless increasing that wages should be raised substantially in Germany, with ECB’s Weidmann saying a 3% wage increase could be the reference point.

Looking at the breakdowns by product groups, low inflationary pressures are broad‐based. More worrying is however that we observe a constant increase in the number of product groups with negative annual inflation rates, currently at more than 30%. While there is no deflation in the meaning of a prolonged period of broadbased declining prices, deflation risks are increasing as downward price pressure are spreading –based across products groups. We will keep a close eye on this indicator.

Recently, inflation forecasts for the euro area were constantly downwardly revised and suggest that inflation is unlikely to reach 2% before 2018. After the ECB’s measures in June however, it will be interesting to see whether inflation forecasts will be upwardly revised. It is however too early to measure the impact of these actions.

Signs of bottoming out, but downside risks remain

While the inflation rate shows signs of bottoming out, we believe that inflation might drop even a little lower in the coming months, before starting to pick up later in the year. Nevertheless any uptick in inflation will be very gradual as the economic recovery in the euro area remains disappointingly slow and insufficient to substantially boost prices. There remains significant downward risks to inflation as the recovery remains fragile and geopolitical tensions are hampering the recovery to gain strength.