Euro area annual inflation unchanged at 1.3 pct in July, likely to reach 1.4 pct in 2018

The final estimate of euro area’s July inflation did not give any surprises. The headline inflation and core print remained unrevised from their flash figures. The headline consumer price inflation stayed unchanged from June at 1.3 percent year-on-year, thus matching the lowest rate so far in 2017. Meanwhile, core rate rose 0.1 percentage point from June’s to 1.2 percent year-on-year, matching April’s near-two-year high.

Services inflation was revised up slightly from the preliminary estimate to 1.6 percent year-on-year, matching June’s rate and remaining close to the top of its range of recent years. But upwards pressure in that category in the past few months was related not least to the timing of national holidays, with price of accommodation, package holidays and air transport the three items making the biggest impact on headline inflation, noted Daiwa Capital Markets Research.

While inflation of non-energy industrial goods was affirmed at 0.5 percent year-on-year, prices of those items would be held back by the euro’s strength in months ahead. The euro has appreciated over 10 percent against the U.S. dollar and over 5 percent in trade-weighted terms to levels well above those assumed in the European Central Bank’s economic forecasts.

Only a small rise in headline CPI is expected in August, mainly on account of higher oil prices, stated Daiwa Capital Markets Research. Given the limited signs of life in the main components, the headline inflation is expected to remain little changed in the remainder of 2017 to average 1.5 percent year-on-year this year, with core inflation likewise moving widely sideways to average 1.1 percent year-on-year.

Given the past shifts in oil prices, headline CPI is then expected to drop in the first quarter of 2018, before a gentle upward trend in core components related to the tightening labor market and continued strong demand eventually pushes inflation higher.

“Overall, we forecast headline inflation of 1.4%Y/Y and core CPI of 1.3%Y/Y over 2018 as a whole, the latter only a touch weaker than currently projected by the ECB”, added Daiwa Capital Markets Research.

At 18:00 GMT the FxWirePro's Hourly Strength Index of Euro was slightly bearish at -54.5962, while the FxWirePro's Hourly Strength Index of US Dollar was neutral at -15.6687. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex

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