As the ECB’s Governing Council meeting approaches on September 12th, markets are keeping an eye on the preliminary figures on euro zone inflation to be released on August 30th.
Inflation is expected to be 2.2% higher than August 2023 levels, according to FactSet consensus estimates, but July’s price increase was lower than last month, when it rose 2.6% from a year earlier.
The core inflation rate, which measures prices excluding energy and food costs, is expected to rise slightly in August from a year ago to 2.8% from 2.9% in July.
“Investors will be pleased to hear that the spike in inflation seen in July should subside again in August, with economists predicting a headline reading of just 2.2%, down 40 basis points from last month. Michael Field, European market strategist at Morningstar, said the core inflation estimates were “still well above the targeted 2% inflation level, but at least “We are moving in the right direction,” he added.
As of July 2024, the largest contributors to the euro area annual inflation rate (HICP) were services (+1.82 percentage points, pp), followed by food, alcohol and tobacco (+0.45 points), and non-energy industrial products (+ 0.19 points). ) and energy (+0.12 pp).
Tomasz Wieradek, chief European economist at T. Rowe Price, said the possibility that the euro zone’s headline HICP inflation rate would fall to 2.2% in August is mainly due to the so-called so-called August 2024 and August 2023 This is said to be the result of a decline in “base” energy prices. effect”.
Wieradek expects core HICP inflation to remain at 2.9% in August. “Services HICP inflation, the most reliable measure of underlying inflation, will likely remain at 4%. Part of the strength in services inflation in August can be explained by temporary price effects related to the French Olympics. “This is likely. However, services inflation remains well above levels consistent with the ECB’s target.”
What are investors’ inflation expectations?
According to the Financial Times, a measure of long-term inflation expectations hit its lowest level in nearly two years in August.
The “5-Year Forward Inflation Swap,” which measures the expected inflation rate for five years starting five years from today, fell below 2.1% last week for the first time since October 2022.
In the minutes of the July Governing Council meeting published on 22 August, the ECB stated that “the information and forward-looking indicators available generally supported the Governing Council’s previous assessment of the medium-term inflation outlook”. said. Headline inflation is expected to fluctuate around current levels for the remainder of this year, decline toward target over the second half of next year, and stabilize around target in 2026.
Core inflation was higher than expected, but “remains exposed to upside risks given repeated upside surprises in services inflation,” the ECB’s minutes said.
Will the ECB cut interest rates in September?
The next ECB monetary policy meeting will be held in Frankfurt on September 12th, with economists expecting a rate cut.
ECB minutes showed officials approached the meeting with a “positive attitude” towards lowering interest rates. “The September meeting was widely seen as a good opportunity to reassess the level of monetary policy restrictions,” the minutes said, adding that reliance on data was “an undue focus on any single data point. He added that it does not mean “that”.
“With inflation settling at or near desired levels and unemployment stabilizing, the ECB needs to reaffirm its future policy, which could lead to further rate cuts this year,” Morningstars Field said. We are well prepared for this,” he said.
“While the momentum in services inflation has declined from the strong levels seen in the first half of this year, it remains too strong and too persistent. However, inflation is not the only relevant data point for monetary policy,” Wieradek said. It’s clear: Negotiated wage growth fell significantly in the second quarter of 2024. Our survey highlights the risk that the economy will slow more than expected.”
Wieradek expects the ECB to cut interest rates by 25 basis points (bp) in September. “Although the euro area is recovering from the large supply-side shock of high energy prices, the stagflationary situation of persistent inflation and weak economic activity is likely to persist for some time,” he added. “For this reason, I think the ECB is likely to cut interest rates only quarterly from September 2024 onwards and suspend rate cuts at the deposit facility rate of 2.5%.”
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