Commentary Directory

The End of Summer Sees the End of Disinflation in Europe

Jacob Hess
August 31, 2023

As the summer comes to a close, so does the disinflation trend in Europe. Euro area annual inflation was stagnant in August at 5.3% YoY, unchanged from the July reading of 5.3% YoY. The moderate monthly gain of 0.6% MoM was the largest since April and ended a string of cooler readings earlier in the summer. The healthy pace was a result of energy prices bouncing off of near-term lows. The energy index increased 3.2% MoM on its own which reversed some of the deflationary pressure that the segment put on the headline rate. The decline of -3.3% YoY was the smallest since April and is likely to continue to get smaller. On the other hand, food inflation was much smaller on a monthly basis, 0.1% MoM, and helped to offset the gains in energy prices. With the annual rate dropping to 9.8% YoY, food price growth has fallen back into single digits for the first time in a long time. The coolness in food prices this month was thanks to a -0.6% MoM decline in unprocessed food prices. Similar trends were evident in August CPI releases from Germany, France, and Italy where each saw the annual rate of growth in food prices ease.

From Eurostat

Core inflation is the bigger talking point from the report. It came in at 5.3% YoY in August which was a slight deceleration from July’s reading of 5.5% YoY, but it still stuck in the 5-6% range where it has been since the beginning of the year. The monthly increase of 0.3% MoM represented a consistent, moderate gain in core prices that is keeping core inflation sticky. Both goods and services annual inflations decelerated in August, but not by very much. The former’s YoY rate was 4.8% YoY, down -0.2 ppts from previously, and the latter’s YoY rate was down just -0.1 ppt to 5.5% YoY. Services inflation is also stuck in that 5-6% range but the latest readings have been towards the mid-to-high part of that range. This will do no favors for anyone who is trying to see a disinflationary trend in euro area core inflation.

This is the last major release before the September ECB meeting, so it will likely set a hawkish tone when members gather to discuss the progress on inflation in the next month. We found out that in today’s ECB minutes for the August meeting, it was decided that “A further rate hike in September would be necessary if there was no convincing evidence that the effect of the cumulative tightening was strong enough to bring underlying inflation down…” That statement suggests that there will be heavy support for another rate hike given how sticky core inflation looked in August. The only major argument against this is that the next two months feature favorable base effects (September 2022 saw 1.2% MoM inflation and October 2022 saw 1.5% MoM inflation) which will help cushion further moderate gains in prices, but that is about it. Energy prices are back on the rise, and food prices are not moving against them. Other goods and services prices are just not falling fast enough. These things point to a hike once summer ends.