Eurozone: Inflation stable in July, unemployment to lowest level since 2009 - ING

Eurozone inflation was stable in July, while core inflation ticked up to 1.2% and unemployment reached its lowest rate since February 2009, points out Bert Colijn, Senior Economist at ING.        

Key Quotes

“ECB hawks should not be too encouraged by the uptick in core as there is little reason for improvements in the coming months.”

“While the economic euphoria continues in the Eurozone with strong growth and improving labour markets, inflation remains miles away from the ECB target. The one bit of good news for ECB hawks was that core inflation ticked up to 1.2%, a level last seen in April. There is some cautious upward pressure on core inflation, which has been expected for some time now as businesses have been increasing their selling price expectations and unemployment has been coming down, boosting sales. June’s unemployment rate dropped to 9.1%, the lowest rate since February 2009. The modest pressures on core inflation from these developments are still unlikely to cause core to increase much further this year while also headline inflation is unlikely to rise above 1.5% this year.”

“In fact, continued weakness in oil prices and strength in the euro make continued weakness in inflation likely. For the ECB, this could result in downward revisions to their own inflation expectations at the September meeting. The ECB staff projections currently have a euro-dollar rate of 1.09 priced in for 2018 and 2019, quite far from current levels. That means that quite a substantial adjustment could be in the works, which would reduce inflation expectations for 2018 and possibly 2019 further. So while encouraging economic data from the Eurozone is encouraging ECB hawks, the outlook for 2018 inflation is actually not becoming much stronger.”