Europe Flash: Inflation down in August due to energy and fresh food prices, with core inflation unchanged

The inflation pace should remain below the ECB's target in 2H13 and 2014

Eurozone HICP inflation slowed by 0.3pp to 1.3% y/y in August, somewhat more than in our projection (BBVA Research: 1.4% y/y)

Underlying this month¡¦s decline was mainly the fall in the inflation rate of energy products (-0.4% y/y), after rising in the previous two months (1.6% y/y in both June and July), and in a lesser extent, the slowing inflation in non-processed food (4.4% y/y from 5.1% y/y in July). In particular, the former explained about 0.2pp of the HICP inflation slowdown, while the remainder 0.1pp was due to the latter. Regarding core inflation, it remained broadly unchanged at 1.3% y/y, against our forecast of a slight increase. We projected a slight raise in the inflation rate of non-energy industrial goods that should be offset by a similar decline in services inflation. However, all core components remained also unchanged at July¡¦s rates (see tables and graph below).

Headline inflation is expected to hover around 1.3% y/y in coming months and to remain well below the ECB¡¦s target in 2014

We expect inflation to remain stable at 1.3% y/y in September, as somewhat lower inflation in more volatile components (energy and fresh food) is expected to be offset by slightly higher core inflation, especially in services and non-energy industrial goods. The headline inflation profile could be somewhat more uneven by year-end, increasing slightly to 1.5% y/y in December (1.5% for 2013 as a whole), partly reflecting a lower base effect of energy prices. This performance is expected to remain throughout 2014, but hovering around the projected annual inflation rate for next year (1.4%). In contrast, core inflation is expected to decline slightly again in the last quarter of 2013 (1.2% y/y), but remaining broadly stable around 1.2% y/y over next year.

The slowdown of HICP inflation in August was also widespread across countries

Country by country, the broad-based decline in energy prices was also reflected in a lower headline inflation rate, especially in Spain (-0.3pp to 1.6% y/y) and Germany (-0.3pp to 1.6% y/y), while the decline in French was more moderate (-0.2pp to 1.0% y/y) and Italian inflation remained unchanged (1.2% y/y). In addition, core inflation stabilization was also widespread across countries. In September, the uncertainty about the evolution of inflation increases considerably resulting from the depletion of the impact of tax hikes a year ago, especially in Spain.