A warm GDP release and now an inflation overshoot. Maybe the ECB should’ve waited for the hard data instead of rushing into another rate cut based on a smattering of poor PMIs, but what do I know? (Nothing. I know nothing. In the Socratic sense.)
Headline price growth in Europe rose three-tenths to 2% in October, Eurostat said Thursday. That was more than expected, although it’s important to note that everyone knew the pace was set to pick up following a 0.9ppt drop over the space of just two months.
Core was steady at 2.7%, the slowest since April and the second-coolest since the month prior to Russia’s invasion of Ukraine.
As the figure shows, the month-to-month increase in the annual rate was the largest since late 2023. The culprit (or one culprit anyway): Energy costs, which didn’t recede as much as some analysts apparently hoped. On a MoM basis, the energy gauge rose 0.4%.
Price growth’s obviously come down sharply in Europe, and as noted here on Wednesday, the bloc’s notoriously moribund growth profile means it’s not wrong for the ECB to err on the side of cutting rates. But “not wrong” isn’t always the same thing as “right.”
GDP figures showed the bloc’s economy managed to expand 0.4% sequentially last quarter, double estimates, and unemployment figures released on Thursday showed the jobless rate loitering at a record low of 6.3%. As long as people have jobs (which they do) and pay growth’s a semblance of robust (which it is), services inflation will tend to be sticky in advanced economies.
Price growth in the services sector ran 3.9% in October, unchanged from September’s pace.
Do note: Inflation in Germany rose meaningfully in data released prior to the bloc-wide release. 2.4% (the headline read out of Berlin) was up four tenths from September’s annual rate, and blew past the 2.1% consensus. Growth in Germany was… well, not great in Q3, but any growth there counts as “good” post-pandemic, so 0.2% (the preliminary estimate for Q3) was a solid result.
Put it all together and what do you get? A boring-ass Thursday read, that’s for sure. But also a dilemma for the ECB. It’s not immediately obvious that October’s rush-cut was necessary, but to reiterate: The bloc’s penchant for underperforming on the growth front gives Christine Lagarde plenty of leeway. And there’s plenty of time for things to go wrong again between now and the next meeting.
Still, the abrupt data u-turn’s a bit perplexing for policy. “Inflationary pressures from the job market are not yet a thing of the past,” ING’s Bert Colijn wrote Thursday, adding that the totality of this week’s data “has provided some counterweight to the ECB’s dovish view presented on inflation at the October press conference.”
At that press event, Lagarde “referred to all data pointing in the same direction: Downward,” Colijn went on. “Two weeks later, all data points in a different direction: Upward.”
