Euro Macro: Core inflation low throughout the eurozone – The eurozone’s core inflation rate (inflation excluding food, energy, alcohol and tobacco) has been hovering around a level close to 1% for almost two years in a row now. Indeed, in August it fell to 1.0%, down from 1.1% in July. As such, the underlying inflation rate has persistently been stuck at a level that is equal to only half the ECB’s target. If we look at the latest readings for the big-11 individual eurozone member states (with a share in eurozone GDP of lager than 1%), it turns out that core inflation is already quite close to, but still below, the ECB’s target of 2% in only two countries: Austria (1.7%) and Portugal (1.8%). On the other side of the spectrum, core inflation is still close to zero in Greece, Ireland and Finland.
As the current inflation rate is only a snapshot in time we have also looked at longer-term trends in core inflation. We would expect that in a country such as Germany, where the labour market is tightening and certain sectors in the economy are reportedly suffering from capacity constraints, core inflation would have already embarked on an upward trend. However the twelve-month moving average core inflation rate in Germany has been stuck at 1.3% for around one year now.
The only countries where the twelve-month moving average core inflation rate currently is higher than a year ago are Austria, France, Ireland, the Netherlands and Portugal, albeit that the increase is limited to less than 0.3 percentage points in all these countries. Meanwhile, the upward pressure that this could have had on the eurozone aggregate was wiped away by drops in Belgium, Finland and Greece. All in all, it is very difficult to find any countries that would already come close to meeting the ECB’s target for underlying inflation. This is not even in the case in Germany, which has been moving ahead of other countries in the cyclical upswing of the past few years. We think that underlying inflationary pressures in the eurozone will rise more slowly than the ECB expects. (Aline Schuiling)