Euro zone inflation turns positive again

Transcription

1 Euro zone inflation turns positive again Euro zone headline inflation picked up for a second straight month in June and turned positive for the first time since January. Nevertheless, the annual rate of EMU inflation remains close to zero (.1% Y/Y) and also core inflation stays well below the ECB s 2% target. In June, EMU core inflation rose for a second straight month, to.9% Y/Y from.8% Y/Y in May. Overall, core inflation remains muted due to the very gradual pace of EMU growth and sluggish global environment, keeping oil and commodity prices low. 4,% 3,% EMU CPI Inflation (Y/Y) EMU CPI ECB Target For the first time since January, euro zone headline inflation turned positive again in June, supported by higher energy prices. Monthly figures show that in June upward price pressures were based in energy, due to the recent rebound in the oil price. Apart from energy, prices increased in holiday related sectors ahead of the Summer holidays, while the usual discounts at this period of the year weighed on prices of clothing & footwear and a few other seasonal goods and services. Looking through this seasonal volatility, overall inflation is slowly accelerating. The number of product groups observing negative annual inflation dropped to 2% in June after an uptick in May, the lowest number in five months. Finally, also national data show broad based signs of improvement with only three countries still observing negative annual inflation. Inflation expectations stuck at record lows Despite signs that inflation is slowly picking up and a further increase in oil and other commodity prices, market based measures of inflation expectations show hardly any signs of improvement. Both the 5yr 5yr forward and 1 year inflation expectations, derived from swap markets, dropped to new record lows. The Brexit shock and the Fed lowering its expected rate path led to a new downward shift in inflation expectations. Further central bank stimulus, to counter the negative Brexit fallout, is widely expected, but for now, it fails to boost inflation expectations. Recently, market based measures of inflation expectations edged marginally higher, maybe supported by risk on sentiment and strong US eco data. Headline CPI expected to pick up, but core reading will remain low Euro area headline inflation remains close to zero due to low oil and other commodity prices and sluggish global and EMU growth. Despite accelerating domestic demand, inflation in the services sector remains quite low (1.1% Y/Y), although having picked up slightly in recent months. Supported by a new and continued up leg in the oil price and strengthening domestic demand we expect euro zone headline inflation to pick up further in the coming months. Towards the end of the year, headline inflation will be further boosted by (negative) base effects. Core inflation should profit too, but any rebound will most likely be slow and very gradual as growth remains meagre, further hit by the UK s decision to leave the EU. For now, it is unlikely that core inflation will reach again 2% in the near term due to sluggish global growth and only moderate growth in the euro area. Joke Mertens, KBC Dealingroom P. 1

2 Special aggregates EMU Inflation Rates (Y/Y) CPI Goods vs Services 4,% 5,5% 4,5% 3,% 3,5% 2,5% 1,5%,5%,5% 1,5% 2,5% EMU CPI EMU Core CPI EMU CPI Goods EMU CPI Services While headline inflation rose from.1% Y/Y to.1% Y/Y, core inflation picked up only slightly in June. Higher prices for holidayrelated goods and services were offset by discounting at the start of the Summer sales in several countries. The downtrend in goods inflation slowed further in June, from 1.% Y/Y to.7% Y/Y led by higher energy prices. Inflation in the services sector picked up, but remains below the levels seen at the end of last year and early this year despite strengthening domestic demand. 4,% 3,% CPI at Constant Tax Rate m/m y/y Core CPI (Ex. Food & Energy),3%,86% CPI Ex. Energy,9% CPI Goods,1%,69% CPI Services,34% 1,13% CPI at Constant Tax Rate,16%,7% EMU CPI EMU CPI at Constant Tax Rate Over the previous years, governments took austerity measures including tax increases, which supported headline inflation. In June, inflation at constant tax rate rose from.3 % Y/Y to.1% Y/Y, but remains in negative territory, despite a positive headline inflation rate. P. 2

3 Inflation by country Y/Y Change,1% Contribution to Y/Y change,5%,5% 1,5%,5%,5% 1,5%,1%,15% Y/Y change (month 1) Y/Y change National data show a broad based uptick in inflation. Except for the Netherlands, Austria and Finland, where inflation stabilized, the increase in inflation was broad based across countries. In June, only three countries were still observing negative inflation, while it were still five in May. The graph above shows the contribution of each member state to the.1% Y/Y EMU inflation rate (annual rates of growth multiplied by their weight in the EMU inflation reading). Spain is by far weighing the most on EMU headline inflation, followed by Italy. Although Belgian s weight is quite small, the high rate of headline inflation in the country makes it the biggest positive contributor to the EMU Y/Y inflation rate, closely followed by France and Germany. Weight Y/Y Change (month 1) Y/Y Change (month) Contribution to Y/Y Change EMU CPI Inflation Y/Y 1,1%,1%,1% German CPI Inflation Y/Y,27744,2%,6% French CPI Inflation Y/Y,2551,1%,3%,6% Italian CPI Inflation Y/Y,17662,3%,2%,4% Spanish CPI Inflation Y/Y,1219 1,1%,9%,11% Dutch CPI Inflation Y/Y,4953,2%,2%,1% Belgian CPI Inflation Y/Y,3585 1,6% 1,8%,6% Austrian CPI Inflation Y/Y,3338,6%,6%,2% Greek CPI Inflation Y/Y,2572,2%,2%,1% Portuguese CPI Inflation Y/Y,2132,4%,7%,1% Finnish CPI Inflation Y/Y,1912,3%,3%,1% Irish CPI Inflation Y/Y,1357,2%,1% P. 3

4 Inflation by product group Y/Y change,2%,1%,1%,2%,3%,4% Contribution to Y/Y change 3,% The table below shows that upward price pressures were in June based in energy and holiday related sectors. Prices of seasonal goods as clothing and footwear dropped due to summer discounting. The graph above shows inflation in several categories (restaurants & hotels, education, alcohol & tobacco) is approaching 2%, while inflation is only negative in energy related sectors and communication (on a downward trend for long). The graph above shows the contributions of product groups to the.1% Y/Y inflation rate (annual rates of growth multiplied by their weight in the EMU inflation reading). Negative inflation is almost entirely based in energy related sectors (transportation & housing, elect., gas ), which is an encouraging sign and indicates that downward price pressures are not broad based. Elsewhere upward price pressures are starting to increase. Weight M/M change Y/Y change Contribution to Y/Y change CPI inflation 1,17%,8%,8% Food & Nonalcoholic beverages,1571,16%,59%,9% Alcoholic Beverages, Tobacco & Narcotics,44,19% 1,95%,8% Clothing & Footwear,634 1,78%,48%,3% Housing, water, elect, gas & other fuels,1632,3% 1,2%,2% Furnishings, Household equip. & maintenance,66,3%,2% Health,436,9%,4% Transport,1522 1,1% 2,6%,31% Communications,36,3%,1% Recreation & Culture,948,5%,7%,7% Education,15 1,71%,2% Restaurants & Hotels,914,39% 1,59%,15% Miscellaneous Goods & Services,869,1%,8%,7% 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % CPI Breakdown by Sector % of negative Y/Y CPI vs positive Y/Y CPI 27% 26% 27% 27% 19% 23% 24% 19% 28% 23% 21% 24% 2% Negative Positive This graph represents the percentage of product groups with positive annual CPI rates (dark blue) versus negative CPI rates (light blue). After an uptick in May, the number of product groups observing negative annual inflation dropped from 24% to 2% in June, its lowest level since January, confirming that downward price pressures are easing further. P. 4

5 Forward-looking indicators PPI CPI Inflation Import Prices CPI Inflation 1 8,% 6,% 4,% 4,% 6,% 8,% 1 7,5% 2,5% 2,5% 7,5% 12,5% PPI Inflation EMU CPI Inflation In May, PPI inflation picked up from its lowest level in 6.5 years, rising from 4.4% Y/Y to 3.9% Y/Y. Spurred by a higher oil price, PPI inflation is finally starting to pick up, a move which is expected to continue. EMU CPI Inflation Import Price Index In line with producer prices, also import prices started to pick up in May (from 7.2% Y/Y to 6.3% Y/Y), due to the rebound in oil and other commodity prices. The weaker euro should also help to support import prices. 3 EMU Inflation VS Official Forecasts 2,5 ECB Survey of Professional Forecasts Inflation Expectations 2, ,5 1,5 1 1,5,5 EMU Annual Inflation Y/Y EC ECB IMF OECD ECB Target EMU inflation was flat in 215, the slowest rate of inflation in the history of the currency union. Despite the recent uptick in the oil price, the ECB raised only marginally its inflation forecasts for this year, to.2% from.1% in March Longer term Q2 215 Q1 216 Q2 216 ECB Target In the second quarter, professional forecasters sharply downgraded their inflation forecasts for this year to.3% from.7%. For next year, inflation forecasts were lowered only marginally, from 1.4% to 1.3%. Also longer term inflation is expected to stay below the ECB s 2% target Inflation Expectations from survey measures ,8 2,6 2,4 2,2 2 1,8 1,6 1,4 1,2 1 Inflation Expectations from Swap markets EC's Industrial Confidence Selling Price Expectations EC's Consumer Confidence Price Trends over Next 12 Months Survey measures of inflation expectations picked up further in June. Firm s selling price expectations turned again positive, picking up to its highest level in 2.5 years. Consumers price expectations rose further too, to its highest level in 1.5 year. 1Yr Inflation Expectations Derived from Swap Market 5Yr 5Yr Forward EUR After the Fed lowered its rate forecasts and following Brexit, inflation expectations extended their downward trend. The 5yr 5yr forward dropped to new record lows and 1yr inflation expectations set minor new lows, despite the rebound in the oil price. Following stronger US data and a return of risk appetite on financial markets, inflation expectations edged slightly up. P. 5

6 Contacts Brussels Research (KBC) Global Sales Force Piet Lammens Brussels Peter Wuyts Corporate Desk Joke Mertens Institutional Desk Mathias van der Jeugt France Dublin Research London Austin Hughes Singapore Shawn Britton Prague Research (CSOB) Jan Cermak Prague Jan Bures Petr Baca Bratislava Research (CSOB) Marek Gabris Bratislava Budapest Research David Nemeth Budapest ALL OUR REPORTS ARE AVAILABLE ON This non exhaustive information is based on short term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice. P. 6