Eurozone headline inflation drops, underlying trend strengthening – ING

FXStreet (Barcelona) – Teunis Brosens of ING, reviews the Eurozone inflation data release, and further comments that the slight fall is not worrying, and forecast core inflation to head back above 1% in next year.

Key Quotes

“Eurozone inflation slid back slightly, but this is nothing to worry about. Today’s Eurostat flash estimate shows that Eurozone HICP inflation fell to 0.2%YoY in June (from 0.3% in May). The slight setback was caused by lower energy prices and services inflation reversing last month’s spike.”

“The contribution of energy prices to inflation became more negative, despite the fact that oil prices haven’t moved that much this month. But the fall in the oil price since late last year has a delayed effect on e.g. gas prices, and this is only now starting to weigh in. Expect energy to suppress headline inflation for several more months.”

“Services inflation fell back to 1.0%YoY in June, fully reversing the 0.3%-point rise from last month. As a result, core inflation fell back to 0.8%YoY, showing that last month’s 0.9% was a temporary blip. Our baseline scenario is for core inflation to continue hovering around 0.8% in the months ahead, before strengthening and rising above 1% next year. In fact, non-energy industrial goods inflation is already slowly picking up (to 0.4%YoY from 0.2% last month), no doubt reflecting increasing input costs due to the weakening of the euro over the past year.”

“Moreover, yesterday’s Economic Sentiment Survey by the European Commission showed that selling price expectations in industry, services and retail trade are slowly strengthening. Normalisation of inflation is still far away, but at least the Eurozone has started the journey.”

“With deflation crossed off the list, the ECB can now fully focus on Greece.”

Teunis Brosens of ING, reviews the Eurozone inflation data release, and further comments that the slight fall is not worrying, and forecast core inflation to head back above 1% in next year.

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