There was good news on the inflation front in Europe Friday.
Headline price growth probably receded to just 4.3% in September, Eurostat said, in the flash estimate for this month.
That’s the lowest since October of 2021 and it was accompanied by a below consensus read on core prices, which rose “just” 4.5% from a year ago.
Base effects helped, and part of the drop is lackluster demand which, when considered with price growth that’s still more than double target, points to stagflation. Still, policymakers (and bonds, probably) will take whatever they can get at this point.
The ECB raised rates a 10th time this month. The forward guidance plainly suggested they’d rather not have to hike again. This is the kind of inflation report that helps in that regard.
Recent PMI releases point to a mild recession, and as I like to remind readers from time to time, the monetary policy transmission channel is functioning in Europe.
Loans to companies barely grew in August, indicative of the drag from Christine Lagarde’s panicked efforts to drag the depo rate out of negative territory all the way up to 4% in the space of just 14 months.
Services inflation in Europe ran at 4.7% this month, Friday’s data showed. That was down sharply from the prior month’s 5.5% pace. Indeed, services inflation fell 0.9% MoM.
It’s far too early to say Europe has avoided a wage-price spiral. Indeed, the risk is probably still skewed in that direction. But at 4.3%, inflation in Germany is now back to pre-war levels, and price growth unexpectedly slowed in France this month. At 5.6%, French inflation is still far too high, but services price growth was just 2.8%. The government spent heavily to shield households from the rising energy prices.
With today’s data and this month’s rate hike, headline inflation and the depo rate have converged.
One more downtick will push the pace of annual price growth below the policy rate.
Of course, resurgent oil is a headache. “Energy prices did not fall as much as expected in recent months and are now set to contribute positively again to inflation as oil prices have risen above $90 per barrel,” ING’s Bert Colijn said Friday. “We expect that this will mainly push eurozone inflation higher at the start of next year, and a contribution of one percentage point to headline inflation is not unimaginable.”
The ECB isn’t going to resume hikes just because oil prices rise, but as Colijn went on to note, policymakers do need to be wary of second-round effects. And in any case, elevated energy costs probably mean headline inflation won’t recede to the ECB’s target as quickly as the bank hopes.
