Eurozone disinflation gathers momentum
Eurozone headline inflation fell to 4.3% in September, down from 5.2% in August, while the core rate decreased to 4.5% from 5.3%. The drop in core inflation was larger than our own below-consensus forecast of 4.6%. The decline in the headline rate was also bigger than we expected. We expect disinflation in the eurozone to continue in the coming months. We expect core inflation to gradually decline and reach the ECB’s 2% target around the middle of next year. This is supportive of our view that the ECB is done hiking rates and will pivot to cuts next year
Eurozone headline inflation fell to 4.3% in September, down from 5.2% in August, while the core rate decreased to 4.5% from 5.3%. The drop in core inflation was larger than our own below-consensus forecast of 4.6%. The decline in the headline rate was also bigger than we expected, mainly because energy price inflation fell (to -4.7%, down from -3.3% in August), whereas we had expected a rise in energy inflation on the back of the recent rise in oil prices. The detailed national inflation reports suggest that the inflation rate of car fuel did indeed increase in September due to the rise in oil prices, but this was more than offset by further drops in household energy inflation (gas and electricity). As we have mentioned before, the change in household energy inflation is still being impacted by the (unwinding of a) wide variety of government support measures in different countries since the start of the war in Ukraine. This will continue to impact household energy inflation for the rest of this year and in the first half of 2024. The inflation rate of food, alcohol and tobacco also declined in September (to 8.8% from 9.7% in August). We expect food price inflation to continue to ease in the coming months, but we no longer expect outright declines in food prices (also please read our latest ), implying that the inflation rate of food will fall to levels close to zero during the first half of 2024.
Turning to core inflation, the disinflation of non-energy industrial good prices continued in September (inflation fell to 4.2% from 4.7%). We expect further declines in industrial good price inflation in the coming months, as the upward impact of high energy costs into goods prices is petering out, and weakness in global goods demand will also weigh on prices. Finally, services price inflation fell sharply in September (to 4.7% from 5.5%). Although this was largely due to a downward base effect in transportation services driven by temporary changes in Germany’s public transportation prices during the summer of 2022, we think services price inflation is also easing more fundamentally. Activity in the services sector has clearly slowed in recent months, which is likely to dampen employment and wage growth in the sector. All in all, we expect disinflation in the eurozone to continue in the coming months. We expect core inflation to gradually decline and reach the ECB’s 2% target around the middle of next year. This is supportive of our view that the ECB is done hiking rates and will pivot to cuts next year.