Eurozone inflation: Likely further uptick in September a flash in the pan - HSBC

Analysts at HSBC note that the headline Eurozone inflation rate rose from 1.3% to 1.5% y-o-y in August, which was a touch stronger than consensus (1.4%) but in line with their own forecast.

Key Quotes

“The rise was driven almost entirely by energy base effects, with the energy component rising from 2.2% to 4.0% y-o-y. Unprocessed food inflation stayed at 0.6% y-o-y, with vegetable prices falling -1.7% y-o-y, as the weather-related spike at the start of the year unwound completely. Core industrial goods inflation was also unchanged at 0.5% y-o-y.” 

“The core rate held steady at 1.2% y-o-y and services inflation was unchanged at 1.6% y-o-y for the third month running, as accommodation services (+5.4% y-o-y) and air transport (+7.2% y-o-y) continue to post hefty rises following the strong tourism season.” 

“The rise in inflation was across the board. Among the Big 4, inflation (EU harmonised index) increased by 0.3pps in Germany (to 1.8%) and Spain (to 1.5%), and by 0.2pps in Italy (to 1.4%) and France (to 1%). No eurozone country is now in deflation.” 

“Fuel prices have increased sharply at the start of September, with a rising wedge with the euro-denominated oil price. Although we expect some of the tourism related services price spike to fade, the likely rise in energy inflation could push up overall inflation to 1.6% y-o-y. That might come as a positive surprise for the ECB, given that the September staff forecast saw inflation falling consistently after August.” 

“But September should only be a flash in the pan. With the base effects from energy kicking in, and the recent strength in the euro – up around 7% in trade-weighted terms since mid-April – should begin to bear down on inflation as lower import prices are passed onto eurozone consumers, we expect eurozone inflation to fall sharply after September, reaching about 1.3% in December, and around 1% in January.2 We expect inflation to average only 1.1% in 2018, slightly below the ECB forecast (1.2%).” 

“Furthermore, domestic wage inflation remains muted, and is unlikely to pick up much in the near term in our view. So the ECB is unlikely, we think, to get too excited about the likely uptick in September, ahead of the important meeting in October, where we expect it to announce a very gradual tapering of QE.”