The announcement today of flash inflation for the Eurozone at 0.2% was lower than expectations that inflation would climb slightly to 0.3%. The reading stayed the same as the previous month’s 0.2% reading. The other key measure that is closely watched by the markets was core inflation, which excludes food and energy. Core inflation came in at 0.8%, against expectations it would stay at 0.9% – the same as the previous month’s rate. It was the second consecutive month that there was a slowdown reported in the core rate, although the slowdown was relatively mild from 1% to 0.8%.
However, what the figures suggest is that the European Central Bank might not be closing in on its 2% inflation target. At some point the ECB might have to take additional monetary loosening action on top of the measures announced during its December meeting, which underwhelmed the market.
Looking at the different components of inflation, the volatile food, alcohol and tobacco category is the fastest rising with a yearly change of 1.2%, while services, which is less volatile and a better representation of the underlying domestic economic strength, was growing at 1.1%. On the other hand, non-energy industrial goods’ prices were only growing by 0.5% (despite the weakness of the euro) and energy was dropping by a huge –relative to other categories – 5.9%. Energy’s price drop was the smallest since July 2015, but it will be interesting to observe the effect of more recent drops in the oil price.
The preliminary inflation report was a negative for the euro, as it came on top of the worse-than-expected German preliminary inflation statistics. At the same time it should be pointed out that other Eurozone economic statistics have not painted a negative picture of developments in the Eurozone. Coming up this week are also unemployment and retail sales for November, which could help show how the economy is doing. The euro was already in a downtrend against the US dollar prior to the release of the numbers, having failed to hang on above the 1.08 mark. The figures helped to extend the decline from around 1.0775 to 1.0750.
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