No energy spillovers to core inflation in Europe

Data releases were limited this week, but several tier-two indicators and the first August inflation estimates from individual euro area countries were published. Inflation rose broadly as expected to 2.7% y/y in France and 4.5% y/y in Spain, driven by higher energy prices, particularly motor fuels. More importantly, underlying inflation remained subdued, with core inflation declining in both countries. The energy shock has therefore still not generated any indirect effects or second-round effects six months after the Iran war started. This supports our view that the ECB will hike rates by 25bp in September—fully priced by markets—but deliver no further hikes, compared with market pricing of almost one additional increase thereafter. However, the resilient growth environment in the euro area also means that we no longer expect the ECB to cut the deposit rate back to 2.00% in 2027. For details see: Research Euro Area - New ECB call: No cuts in 2027, 27 August.

In the US, headline PCE inflation was slightly above expectations at 3.7% y/y in July (consensus: 3.6%; prior: 3.7%). Core PCE matched expectations at 3.3% y/y and 0.2% m/m, making the overall upside surprise modest. Revised Q2 GDP confirmed the initial estimate of 1.5% SAAR growth but raised private consumption, imports and the price deflator, while corporate profits increased sharply. The stronger details, combined with slightly higher inflation, pushed yields higher across the curve and EUR/USD lower. Meanwhile, consumer confidence weakened further in August, with the Conference Board index falling to 89.4 from 90.8, below the 91.2 consensus, but without a clear market signal.

In Germany, the Ifo index rose more than expected in August. The current assessment index increased to 88.5 (consensus: 87.0; prior: 86.6), its highest level since 2024, while expectations climbed to 89.1 (consensus: 87.5; prior: 86.6), nearly returning to their pre-war level. Evidence of a clear German recovery is therefore mounting, led particularly by manufacturing. We expect the rebound to continue, supported by a marked rise in survey orders and expansionary fiscal policy.

Next week brings several tier-one releases, including the US jobs report, euro area flash inflation and Chinese PMIs. We expect nonfarm payrolls to rise by 65k, slightly above the 55k consensus, while unemployment remains at 4.1%, indicating a still-tight labour market. Average hourly earnings are expected to increase by 0.3% m/m. A strong report could add pressure on the Fed to raise rates. We expect euro area HICP inflation to rise to 3.4% y/y from 3.0% y/y driven mainly by energy prices. Core inflation is expected to decline to 2.4% y/y from 2.5% y/y due to a continued lack of spillovers from energy prices to underlying inflation.

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