Europe | Inflation converging to target, growth in play

Summary

The European Central Bank (ECB) can take satisfaction from recent inflation data from the eurozone. Much of the downside surprise has been due to the drop in oil, but there is also some progress in services prices. Coupled with economic weakness, the scenario is a further interest rate cut.

Key points

• Key points:
• The recent 10% spike in oil prices due to increased tensions in the Middle East would only translate into about a tenth more in headline inflation. It should not be an obstacle in the disinflationary race.
• The focus is on the services component, which has been the most sticky, falling by only a tenth of a percentage point to 4% in September on a year-on-year basis, but on a seasonally adjusted monthly basis we see a clear trend of deceleration.
• This inflation data alone should not have raised expectations of a rate cut at the next ECB meeting, but in recent months the ECB's attention has increasingly turned to economic weakness.
• This context of economic weakness has been endorsed by Lagarde's recent statements at the European Parliament, which finally led the market to anticipate a 25 basis point cut in ECB interest rates at the next meeting.
• Between now and the end of this year, we expect both headline and core inflation to accelerate, averaging 2.4% and 2.9% for this year, and around 1.9% and 2.1%, respectively, for next year.

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