Christine Lagarde’s noncommittal approach to future monetary tightening was validated Monday by mixed top-tier data.
GDP and inflation figures for July painted a murky picture of the European economy 12 months on from the first rate hike and 16 months into the first major ground war since the Reich.
The inflation numbers came in a bit warm. Core inflation likely ran at 5.5% in July, Eurostat said. That was ahead of consensus and unchanged from June’s upwardly revised pace.
Note that core price growth now exceeds headline inflation, which was 5.3% this month.
A glass half-full take says this is actually going fine. Base effects, including and especially those related to energy, are taking down headline price growth, and that should continue at least for another few months. The energy gauge fell more than 6% from last year. At the same time, food inflation was “just” 10.8% in July, the lowest in nearly a year.
A glass half-empty take says price pressures are now embedded in wage-setting, and that’s manifesting in services inflation, which rose again in July to 5.6%.
The steady grind higher in services price growth is vexing. You have to have price stability there. The favorable YoY comps that are pushing down the headline rate aren’t going to last forever. At some point, underlying inflation needs to show signs of moderation, and that depends pretty heavily on the interplay between wages and prices charged for services.
“Services inflation continues to trend up as wage growth push[es] input costs for service providers higher,” ING’s Bert Colijn said. “Demand is also much stronger than for goods, allowing price increases.”
Preliminary PMIs for July suggested firms’ input costs fell a 10th month, and the increase in prices charged was the slowest in nearly two and a half years. But it still feels like service providers are passing along higher wage bills to consumers with relative ease.
Meanwhile, the euro-area economy expanded a brisker-than-expected 0.3% pace in Q2, according to the first estimate from Eurostat, also released on Monday. The “strong” print was dismissed out of hand, or if that’s too harsh, suffice to say analysts were quick to point out that Ireland was an outsized contributor.
“This figure is inflated by companies relocating funds to take advantage of Ireland’s ‘friendly’ tax environment,” Rabobank’s Maartje Wijffelaars, who called the inflation figures “slightly disappointing for the ECB,” remarked.
Ultimately, the GDP figures weren’t robust by any stretch. As discussed here late last week, the numbers vary significantly from country to country (the same is true of the inflation prints), but Germany is mired in a shallow recession and it’d be ludicrous to base policy decisions on “strength” in Ireland.
Bottom line: The growth data released on Monday was probably dovish for monetary policy. “Looking through the most volatile components, we argue that the economy has remained broadly stagnant,” ING’s Colijn wrote, in a separate note. The inflation figures, though, were neutral for the ECB at best, and could be construed as hawkish.
Taken together, the figures were inconclusive for Lagarde and the September ECB meeting. “These mixed data allow the ECB to both argue for a longer hold as well as for another hike,” Rabobank said.
