Eurozone consumer prices rose by 0.1% year on year (y/y) in June, which was the first positive reading since January. There was a marked narrowing of the y/y drop in energy prices in June, while core inflation edged up to 0.9% from 0.8% in May.
IHS Markit perspective | |
Significance | Eurostat has confirmed that Eurozone consumer prices rose by 0.1% year on year (y/y) in June following drops of 0.1% y/y in May and 0.2% y/y in April. |
Implications | The Eurozone was helped out of deflation in June by the y/y drop in energy prices narrowing to 6.4% from 8.1% in May. The European Central Bank (ECB) will take a little comfort from the fact that core inflation (which excludes energy, food, alcohol, and tobacco) edged up to 0.9% in June from 0.8% in May. This reinforces belief that the ECB will sit tight at its 21 July policy meeting and continue to focus on the implementation of the major package of measures it announced in March. |
Outlook | IHS suspects that May could prove to have been the last month of deflation and that Eurozone consumer price inflation will edge gradually higher over the coming months. In particular, the y/y drop in energy prices should progressively fall over the coming months and turn positive later in the year. However, should the United Kingdom's decision to leave the European Union weigh down significantly on Eurozone growth, there will be an increased risk that Eurozone consumer price inflation will fail to pick up and remain mired at very low levels. |
Final Eurostat data confirm the "flash" estimate showing that the Eurozone exited deflation in June. Consumer prices edged up by 0.1% year on year (y/y) in the month, following dips of 0.1% in May and 0.2% in April. June actually saw the first y/y rise in Eurozone consumer prices since January as prices had earlier been flat y/y in March and down 0.2% y/y in February.
In fact, the Eurozone has been drifting in and out of deflation since it first occurred in December 2014. There were four months of deflation through to March 2015, peaking at 0.6% in January 2015, and it also occurred in September 2015 when consumer prices fell by 0.1% y/y. In between, the Eurozone has experienced limited inflation, which peaked at 0.3% in both January 2016 and May 2015. This compares with the European Central Bank (ECB) target for Eurozone consumer price inflation of "close to, but just below 2.0%". Eurozone consumer price inflation first moved below what the ECB considers to be a danger level of 1.0% in October 2013, and it has remained below this level ever since. Although this has been largely due to extremely low oil and commodity prices, core inflation has also been well below what the ECB would like to see.
Year-on-year drop in energy prices narrows in June
The Eurozone was helped out of deflation in June primarily by the y/y fall in energy prices narrowing to 6.4% from 8.1% in May and 8.7% in both April and March. This was the consequence of oil prices firming to a 2016 high in early June. Indeed, Brent oil traded above USD51/barrel, compared with a near 12-year low of USD27.1/barrel in January.
Eurozone inflation, % change | ||||||
M/M | Y/Y | |||||
Jun 2016 | Jun 2016 | May 2016 | Year to date | 2014 | 2015 | |
Harmonised index of consumer prices, all items (2005) | 0.2 | 0.1 | -0.1 | 0.0 | 0.4 | 0.0 |
- Energy | 1.7 | -6.4 | -8.1 | -7.6 | -1.9 | -6.8 |
- Overall index excluding energy and unprocessed food | 0.0 | 0.8 | 0.8 | 0.8 | 0.9 | 0.8 |
- Overall index excluding energy, food, alcohol, and tobacco | 0.0 | 0.9 | 0.8 | 0.9 | 0.8 | 0.8 |
- Food and non-alcoholic beverages | -0.1 | 0.6 | 0.6 | 0.6 | -0.1 | 0.7 |
- Alcoholic beverages, tobacco, and narcotics | 0.2 | 1.9 | 1.9 | 1.7 | 2.7 | 2.1 |
- Clothing and footwear | -1.8 | 0.5 | 0.8 | 0.5 | 0.3 | 0.1 |
- Furnishings, household equipment and routine maintenance of the house | -0.1 | 0.3 | 0.4 | 0.5 | 0.2 | 0.3 |
- Housing, water, electricity, gas, and other fuels | 0.4 | -1.2 | -1.5 | -1.4 | 0.8 | -0.7 |
- Transport | 1.0 | -2.1 | -2.9 | -2.5 | 0.0 | -2.4 |
- Communications | -0.3 | -0.1 | 0.1 | 0.0 | -2.8 | -0.8 |
- Education | 0.0 | 1.7 | 1.7 | 1.7 | 0.5 | 0.9 |
- Health | 0.0 | 0.9 | 0.8 | 0.8 | 1.0 | 0.8 |
- Recreation and culture | 0.5 | 0.8 | 0.6 | 0.8 | 0.1 | 0.3 |
- Restaurants and hotels | 0.5 | 1.6 | 1.6 | 1.7 | 1.5 | 1.7 |
- Miscellaneous goods and services | 0.0 | 1.0 | 0.8 | 0.9 | 0.8 | 0.9 |
Source: Statistical Office of the European Communities | ||||||
There was no impact from food prices as the y/y increase in unprocessed food prices was 1.5% in June, as it had been in May.
Core inflation edges up in June
The ECB will be pleased to see that core Eurozone inflation (which excludes energy, food, alcohol, and tobacco) edged up to 0.9% in June from 0.8% in May and 0.7% in April. It had relapsed to April's low from 1.0% in March. April's drop had been significantly influenced by an unwinding of March's Easter-related spike in holiday and travel prices. Even so, core inflation in June was only in the middle of the 0.7–1.1% band that has held since May 2015.
Services inflation rose to 1.1% in June from 1.0% in May and 0.9% in April; it had been 1.4% in March. However, the y/y increase in non-energy goods prices edged down to 0.4% in June from 0.5% in May–March and 0.7% in both February and January.
Seven Eurozone countries experience deflation in June
The number of Eurozone countries experiencing deflation fell back to 7 in June from 10 in May and 12 in April. Greece (partly due to a value-added tax rise), Ireland, and Slovenia exited deflation in June. Additionally, German inflation moved into positive territory, having been flat in May.
The countries still experiencing deflation in June were Cyprus (2.0%), Spain (0.9%), Slovakia (0.7%), Latvia (0.6%), Luxembourg (0.4%), Italy (0.3%), and the Netherlands (0.2%).
There was inflation during June in Ireland (0.1%), Slovenia (0.1%), Germany (0.2%), Greece (0.2%), France (0.3%), Finland (0.3%), Estonia (0.4%), Lithuania (0.4%), Austria (0.6%), Portugal (0.7%), Malta (1.0%), and Belgium (1.8%).
Outlook and implications
IHS Markit suspects that May could prove to have been the last month of deflation and that Eurozone consumer price inflation will edge gradually higher over the coming months. With Brent oil currently trading around USD47/barrel, the y/y drop in energy prices should progressively fall over the coming months and turn positive later in the year. Additionally, commodity prices have recently been firmer overall. We expect Brent oil prices to hover in a range of USD45–55/barrel for an extended period before firming to USD60/barrel in the second half of 2017 (to average USD44.7/barrel in 2016 and USD57.0/barrel in 2017). Additionally, we believe that commodity prices will slowly pick up.
It is also notable that the European Commission survey showed that pricing expectations for manufacturers moved into positive territory in June for the first time since October 2014 and reached a 29-month high, although they were still below long-term norms. Pricing expectations softened for services companies in June after a spike in May but were actually above long-term norms. The European Commission's survey also showed that consumers' inflation expectations rose for a third month running to a 17-month high in June, although they were still substantially below long-term norms. We also expect a weakening of the euro over the coming months to have some upward impact on inflation.
However, the rise in Eurozone consumer price inflation over the coming months is likely to be limited by the UK's decision to leave the European Union weighing down significantly on Eurozone growth. As a result, we suspect that Eurozone GDP growth could now be limited to 1.5% in 2016 and 1.1% in 2017 before improving to 1.6% in 2018. This means that output gaps will remain large in a number of countries and that slack in labour markets will remain, allowing companies to limit wage growth. Consumers are likely to remain very price conscious. This combination of factors is likely to maintain pressure on retailers, manufacturers, and service providers to price competitively.
Consequently, Eurozone consumer price inflation is expected to trend upwards gradually to 0.9% at the end of 2016 and 1.7% at the end of 2017. This means that Eurozone consumer price inflation is not expected to get back to its target of "close to, but just below 2.0%" before 2018.
ECB likely to remain in "wait and see" mode
The Eurozone's exit from deflation in June and the recovery in Eurozone equity markets after the immediate post-Brexit-vote plunge eases pressure on the ECB to take any policy action at its 21 July meeting. This is reinforced by the Bank of England holding off from loosening monetary policy at its 13 July meeting. The ECB responded to the UK vote to leave the EU by stating that it was ready to provide additional liquidity if needed, in euro and foreign currencies. The ECB also indicated that it was prepared to take whatever action was necessary to ensure price and financial stability.
For now at least, we expect the ECB to stay in "wait and see" mode and to continue to focus on implementing its March package of measures. The ECB's recent mantra has been that patience is needed in getting Eurozone consumer price inflation up near to 2.0%. We believe that if the ECB does eventually feel that further stimulative measures are necessary to counter the downside risks to the Eurozone growth and inflation forecasts stemming from the Brexit vote, it would most likely extend non-conventional measures (in particular the length of its quantitative easing programme and possibly also the monthly amount of purchases). We are doubtful that the ECB would take interest rates any lower, with the deposit rate already at -0.40%. Although the ECB has indicated that interest rates could possibly go lower, there is clearly heightened concern over the impact that negative/low interest rates are having on Eurozone banks.