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Euro area HICP inflation was unchanged at 0.2% y/y in August against consensus expectations of a small decline to 0.1% y/y. Core inflation was unchanged at 1.0% y/y, which was also better than expected as consensus was for a decline to 0.9% y/y.
The unchanged headline inflation followed despite a sharp drop in the oil price in August. The drop in the oil price resulted in lower energy price inflation, which was down at -7.1% y/y in August from -5.6% y/y in July, but the decline was compensated for by higher goods and food price inflation.
"Food price inflation increased to 1.2% y/y in August from 0.9% y/y in July. The increase was driven by the volatile component 'unprocessed food', which increased to 2.3% y/y from 1.4% y/y, whereas the more stable 'processed food' was unchanged at 0.6% y/y",notes Danske Bank.
Looking at the details for core inflation the labour-dependent service price inflation was unchanged at 1.2% y/y, while goods price inflation increased for the six consecutive month. It is now at 0.6% y/y, which is the highest rate since June 2013.
The stable headline and core inflation in August reduces the pressure on the ECB a bit. However, due to the latest decline in the oil price there is still a risk of lower core inflation due to an indirect impact from energy prices.
The ECB will keep a close eye on core inflation. It is believed, ECB's core inflation forecast for 2016 as too optimistic and lowering could imply the ECB will extend its QE purchases beyond September 2016. However, it as most likely that the ECB will revise its core inflation forecast in December 2015 or in 2016.
"We still expect a dovish tone from Draghi on Thursday as there is increasing pressure on him with inflation expectations de-anchoring. This should also follow as the ECB's outlook for higher inflation is threatened by the lower oil price and stronger EUR. Added to this, we expect more emphasis on the downside risk to the growth outlook due to the weakness in China", says Danske Bank.
