Euro Macro: Inflation rises on food and energy in November and will rise further – The first eurozone member states published inflation reports for November today. The results were mixed, but the overall picture is that inflation rose on the back of a jump in food price inflation. To begin with, HICP inflation in Germany rose to 1.2% yoy in November, up from 0.9% in October. In addition, Spain reported that harmonized HICP inflation rose to 0.5% from 0.2%. Finally, Belgium published inflation according to the national (non-harmonized) definition, which decreased to 0.4% in November, down from 0.5% in October. The detailed inflation data (for instance, from Germany’s main states and regions) and the written comments by the statistical agencies suggest that the rise in inflation was mainly due to a jump in food price inflation, while energy price inflation increased as well. Meanwhile, the national inflation reports that were published today, suggest that core inflation remained more or less stable. Tomorrow, eurozone aggregate inflation for November will be published. We expect the headline rate to rise to 0.9% from 0.7% in October, and the core rate to stabilize at 1.1%.
Looking ahead, we expect headline inflation to rise somewhat further, mainly due to upward base effects stemming from oil prices. The rise in energy inflation in November seems to have been more moderate than what could have been expected on the basis of upward base effects in oil prices. This suggest that the upward impact of oil prices on energy inflation will filter through with a delay and materialize in the next few months. In addition, wholesale food prices also signal further rises in food price inflation. Bringing all this together, headline inflation looks set to rise to around 1.2% by early next year.
However, headline inflation will likely ease again during the course of 2020, as transient effects fade and as underlying inflationary pressures weaken. Indeed, core inflation, which has remained stuck at a level close to 1% since the end of 2016, is expected to continue to hover around the same level in the coming months. Subsequently, it should slowly edge lower in the course of 2020, as the weakness in the economy makes its presence felt. The cyclical slowdown in economic growth means that cost pressures are leading to margin compression rather than price rises, while cost pressures are (and should continue) to ease going forward as labour markets loosen. Meanwhile, inflation expectations have declined, both as measured by market pricing, as well as surveys. Low inflation expectations can also impact price wage and price setting behaviour. (Aline Schuiling & Nick Kounis)