Eurozone inflation preview: What to expect from…

Core inflation, which shows prices without energy and food costs, it is expected to have eased slightly to 2.8% annually in August from 2.9% in July.

“Investors will be happy to hear that new inflation increase Guided in July should decrease again in Augustwith economists expecting a title reading of only 2.2%, a 40 base drop point on last month and a number much closer to European of the Central Bank target level,” said Michael Field, European market strategist at Morningstar, adding that the estimated data for core inflation”remain significantly higher than the target inflation level of 2%; however, at least it’s moving in the right direction.”

In July 2024, the biggest contributors to the euro area annual inflation rate (IACP) were services (+1.82 percentage points, pp), followed by food, alcohol and tobacco (+0.45 pp), industrial goods non-energy (+0.19 pp. ) and energy (+0.12 pp).

According to Tomasz Wieladek, chief European economist at T. Rowe Price, the likely drop to 2.2% in euro area HICP inflation is mainly the result of lower energy prices in August 2024 compared to August 2023, the so-called “core “. effects”.

Wieladek expects core HICP inflation to remain at 2.9% for August. “HICP inflation for services, the most reliable measure of core inflation, is likely to remain at 4%. Some of the strength in services inflation in August can likely be explained by one-off price effects related to the French Olympics. However, services inflation. remains significantly above levels in line with the ECB’s target,” he told Morningstar.

Core inflation, the measure that excludes volatile components such as fuel and food, is also expected to easeup 10 basis points to 2.8%.

What are investors’ expectations for inflation?

In August, the indicator of long-term inflation expectations reached its lowest level in almost two years, according to Reuters Financial Times.

The five-year five-year inflation swap, which measures the expected rate of inflation over the five-year period starting five years from today, fell below 2.1 percent last week for the first time since October 2022.

In the minutes of the July meeting, published on August 22, the ECB said that “the information received and outlook indicators broadly supported the Governing Council’s previous assessment of the medium-term inflation outlook”. Headline inflation is expected to fluctuate around current levels for the rest of the year and decline towards target in the second half of next year and then stabilize around target in 2026.

Core inflation was higher than expected, according to the ECB minutes, and is “still subject to upside risks given the repeated upward surprises in services inflation”.

Will the ECB cut interest rates in September?

The ECB’s next monetary policy meeting will be held in Frankfurt on September 12, and economists are widely expecting an interest rate cut.

According to the ECB minutes, officials are approaching the meeting with an “open mind” to cutting interest rates. “The September meeting was widely seen as a good time to reassess the level of monetary policy tightness,” the minutes said, adding that data reliance does not mean “being too focused on single data points “.

According to Morningstar’s Field, “with inflation apparently seated at or around where it should be, and stable unemployment, the ECB should be reaffirmed in its course of action. This sets us up nicely for further rate cuts this year.”

Wieladek said: “Although the momentum in services inflation has eased from the strong levels seen in the first half of the year, it remains too strong and too sticky. However, inflation is clearly not the only data point relevant to monetary policy. The wage increase negotiated in Q2 2024 has fallen significantly. Business surveys highlight the risk that the economy will slow more than expected.”

Wieladek expects the ECB to cut its policy rates again in September by 25 basis points. “As the euro zone recovers from the large supply shock from high energy prices, this stagflationary picture of sticky inflation and weak activity is likely to persist for some time,” he added. “That’s why I think the ECB will cut on a quarterly basis only after September 2024 and probably stop cutting at a deposit facility rate of 2.5%.