Euro area inflation raises the risk of ‘strong’ hike
Euro area inflation once again surprised on the upside in August, rising to 9.1% y-o-y
as a result of stronger core pressures. Monthly price momentum remained as intense
in August as it had been during the year to date, with core goods (rather than
services) prices largely responsible for stronger prints over recent months.
•This will increase pressure on the ECB to at least consider an outsized (75bp) rate
hike at next week’s meeting. While thus far we have been expecting a 50bp move in
September, today’s numbers together with a clear willingness among a number of
Governing Council members for a “strong” hike (in Bundesbank President Nagel’s
words) underpin market expectations, which are split between a 50bp and 75bp hike.
After inflation surprised to the downside from France but to the upside from Italy and the
Netherlands (the latter rising by a full 2pp between July and August), flash euro area
inflation printed at 9.1% in August today – slightly above the 9.0% expected by consensus
(and ourselves) and a rise from 8.9% the previous month. Core inflation was largely
responsible for the modest upside miss, rising to an annual pace of 4.3% versus 4.1%
consensus (and 4.0% in July).
Ongoing upside surprises
This marks yet another upside surprise to consensus forecasts. In fact, the last time we
had a negative surprise to consensus was in March 2021. While the forecast errors have
been getting smaller (Figure 1) this is more a feature of economists revising up their
forecasts (i.e., expectations evolving adaptively) than it is reflective of the momentum in
consumer prices easing.
No let-up in consumer price momentum
Indeed, in that respect, we like to look at the monthly growth rate of core prices as a
means to gauge what the momentum of underlying prices is doing. However, with Eurostat
publishing HICP on a non-seasonally adjusted basis, it is important to look at monthly
changes relative to what normally happens for the time of year.
In August, core prices rose by 0.5%, which was 0.3pp above a “typical” August rise (we
take 2015-19 as being a typical rise). That’s a similar degree of “excess price growth” to
what we had seen in the first seven months of the year. Or another way of putting it,
there’s been no let-up in core price momentum in today’s August report. We illustrate this
in Figure 2, which shows the widening gap between core consumer prices and their
Some people say that a good chart is like a good joke, it shouldn’t need any explanation.
While the following chart does require a bit of explanation, we still find it particularly useful
in showing how the momentum in euro area inflation is developing. In short:
The red line – when it’s above zero (like it was in August), it shows that core price
growth continues to be faster than normal.
• The grey bars show that this has largely been due to core goods rather than core
services (pink bars) in recent months.
Within the detail of today’s figures – energy prices were flat, food prices were up strongly
again (1% m-o-m), core goods price are now rising at a 5% y-o-y pace (from 4.5% in July)
while service price inflation inched up to 3.8% y-o-y from 3.7% in July.
Overall this is a stronger-than-expected flash inflation print at the headline level, which
was generated by continued momentum in core prices.
When it comes to the implications for next week’s ECB meeting, today’s print will do
nothing to reduce the risk of the ECB raising rates by 75bp, a possibility which the market
is currently attributing around a two-thirds chance to (Bloomberg currently shows that
pricing is around +67bp for next week’s policy rate decision; Figure 4).
Thus far we have maintained a view for a 50bp hike in September. Not only does today’s
inflation print raise the risks to the upside but so too does ECB commentary, including that
from Bundesbank President Nagel, who just today talked of the need for a “strong” hike
from the ECB next week. Chief Economist Philip Lane may be calling for rate hikes at a
“steady pace” but the bulk of recent policymaker commentary appears to be focused on
the need to at the least consider, if not vote for, a more sizeable move.