Euroland: Inflation sends mixed signals – UOB

Economist at UOB Group Lee Sue Ann reviews the latest inflation figures in the euro area.

Key Takeaways

“Eurozone CPI rose to 2.2% y/y in July, confirming an earlier estimate, and up from 1.9% y/y in June. This is the fastest pace since October 2018, and above the European Central Bank (ECB)'s target of 2.0%... Core CPI eased to 0.7% y/y, mostly on lower clothing prices due to the timing of summer sales in France and Italy. This was in line with the initial estimate, and down from 0.9% y/y in June. Month-on-month, inflation in the bloc fell 0.1% m/m, in line with expectations.”

“The ECB is predicting further increases in inflation in the coming months, but sees this as largely temporary. We, too, expect to see inflation readings increasing further in August. The core rate should rebound above its June level, as the effect from the timing of clothing sales in France and Italy reverse. But we see the July readings as consistent with the view that the current upturn in inflation will prove transitory. Not least because it was largely driven by base effects from Germany that will unwind at the start of next year.”

“The sharp jump in inflation readings to pre-pandemic levels earlier this year signaled a rebound in economic activity, but core inflation remains subdued. There is still evidence of global supply chain issues feeding its way through pandemic high-demand items, albeit to a lesser extent than in the US, and these inflationary pressures are being offset by disinflation in parts of the service sector. That said, inflation in the service sector should recover as the Eurozone economy sustainably reopens, though gains will be offset somewhat by easing global supply chain bottlenecks in many goods prices.”