Eurozone Inflation Unexpectedly Cools

In the latest headache for Mario Draghi, the Eurozone's closely watched CPI weakened to 1.40% year-on-year in October 2017 versus expectations of 1.50% and a reading of 1.50% the previous month. As a reminder, according to the ECB's September forecast, HICP inflation is expected to rise to 1.5%, leaving little margin for deflation in the next few months, especially if Draghi's tightening overtures are to be taken seriously.

The miss in core CPI (excluding energy, food, alcohol and tobacco) was bigger, with core prices printing at 0.90% , below expectations of 1.10% and down from 1.10% in September.

In contrast, data on growth of the Eurozone economy beat expectations, with Q3 GDP growth rising 0.6% Q/Q versus the consensus of 0.5%. Eurozone unemployment for September 2017 was 8.9%, below both the consensus of 8.9% and the prior month of 9.0%.

More details from Bloomberg which notes that "Euro-area inflation unexpectedly slowed in October despite the bloc’s strengthening economy, underlining why the European Central Bank last week kept its exit from monetary stimulus wide open. Price growth cooled to 1.4 percent from 1.5 percent in September, falling short of the median forecast of economists in a Bloomberg survey. In a further blow to the ECB’s drive to boost inflation, the core rate dropped below 1 percent for the first time in five months. The euro stayed lower against the dollar after the report and was down 0.2 percent at $1.1631 as of 11:02 Frankfurt time. The inflation data was published alongside third-quarter gross domestic product figures, which showed faster-than-forecast 0.6 percent growth. That’s an 18th quarterly expansion. On a year-on-year basis, GDP hit 2.5 percent, the best since early 2011."

Weaker CPI and stronger GDP growth was precisely the inverse of the latest data out of the UK, taking about an economic divorce. However, with inflation once again tapering, no pun intended, the latest Eurozone CPI report will not be well received by the ECB. As with the BoJ, reality and the bank’s inflation target are diverging.

As Bloomberg adds, the latest economic figures show the dilemma facing the ECB. Even with confidence at its highest in almost 17 years – a function of record high stock prices – and robust growth helping to create more jobs, a sustained price pickup remains elusive. Mario Draghi took note of the euro area’s improved prospects after the Governing Council’s Oct. 26 policy meeting, while stressing the need for a “patient and persistent” approach toward exiting the central bank’s stimulus program. Core inflation, which excludes volatile items such as food, energy and tobacco, dropped to 0.9 percent in October from 1.1 percent. Economists had forecast that the rate would remain unchanged. With a goal of sustaining inflation just below 2 percent without stimulus support, the ECB decided to continue buying public and private debt through September 2018, at a reduced pace of 30 billion euros ($35 billion) a month. Respondents to the ECB’s Survey of Professional Forecasters see inflation averaging 1.9 percent in 2022.

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