Global Daily – Inflation to recover next year but depressed over the medium term

Euro Macro: Inflation stuck in negative territory in November, recovery next year but medium term subdued – With the exception of France (HICP inflation 0.2% in November, up from 0.1% in October), all countries reported HICP inflation rates well below zero. In Germany the harmonised inflation rate declined to -0.7% in November, down from -0.5% in October. In Italy it increased to -0.3% from -0.6% and in Spain it remained unchanged at -0.9%. The main reason for the negative headline inflation rate in November, was energy price inflation, which remained roughly unchanged at very low levels in most countries (France: -7.8% in November, unchanged from October; Germany: -7.7% from -6.8%; Italy: unchanged at almost -9%).

With regard to the two major components of core inflation, there was divergence between manufactured goods inflation, which declined in most countries (e.g. in Germany to -1.8% from -1.5% and in France to -0.4% from -0.1%) and services price inflation, which edged higher in most countries (Germany to 1.1% from 1.0%; Italy to +0.1% from -0.1%; France to 0.7% from 0.4%).

Having said that, the November inflation data are surrounded by more uncertainty than normal as in most countries new lockdown measures meant that a larger proportion of inflation needed to be imputed and/or the inflation rate needed to be assumed to have been unchanged. Indeed, France’s statistics bureau INSEE mentioned that price collection carried out by collectors on the field (about 40% in the CPI) has been suspended since the 30th of October. Despite the introduction of new collection methods (price collection online, telephone collection, scanner data), the quality of the November indices was affected. Moreover, the missing prices due to a lack of collection or an impossibility to purchase the products were imputed in compliance with Eurostat guidelines, which means they had to be estimated in such a way that the impact on the yoy change in the price was as limited as possible. Based on the experience of the previous lockdown, this likely means that prices in the sectors most impacted by restrictions are likely over-estimated.

Eurostat will publish the flash estimate for eurozone aggregate inflation in November tomorrow. We expect the headline to have remained stable at -0.3% (the consensus forecast is for a rise to -0.2%), while the core should have remained at 0.2%. Looking further forward, inflation will likely rebound – but only temporarily – next year.  The biggest driver behind the rebound will be energy inflation. In October, energy stripped off 0.8 percentage points off year-over-year headline inflation at the eurozone aggregate level. This reflects the sharp drop in oil prices earlier in the year and will fall out of the annual comparison early next year. In addition, core inflation has been depressed by changes in indirect taxes. In particular, the VAT cut in Germany will be reversed in January. Finally, the sharp drop in services inflation is almost entirely due to travel-related prices. These will likely remain depressed but price falls might be less sharp next year, while their weight in the HICP basket will also likely decline.

Having said that, we continue to think that disinflation will re-assert itself as the dominant trend over the 2-3 year horizon. The disinflationary impact of an economic shock usually works with a lag and these effects are probably largely still in the pipeline. Two years after the global financial crisis, core inflation was one percentage point lower, while it was 0.75% lower after the euro crisis. Indeed, despite the likelihood of strong economic growth during the course of next year, large swathes of spare capacity will remain. For instance, we estimate that GDP will be around 4.5 percentage points below its trend level. This will be reflected for instance in elevated levels of unemployment.