Euro area back into deflation

Euro area HICP inflation declined back into deflation territory in September. Headline inflation was -0.1% y/y, down from +0.1% y/y in August. Core inflation was unchanged at 0.9% y/y in September, notes Danske Bank. 

The decline in inflation is driven by lower gasoline prices, which resulted in a larger drag from energy price inflation. Energy prices declined 1.7% m/m in September bringing the yearly rate down to -8.9% in September from -7.2% in August. The drag from energy price inflation should start to fade and if energy prices are unchanged in October, base effects imply energy price inflation will increase to -8.1% y/y.

A larger decline in goods price inflation was expected but the lagged impact from the weaker effective euro still seems to be supportive. A downside risk to the forecast is seen for goods price inflation due to an indirect impact from the low oil price and less tailwind from the effective euro due to the latest strengthening. 

"In our view, the dip back into deflation is set to be temporary and we look for a rise in inflation in Q4. Higher inflation should be driven by positive base effects from the drop in the oil price at the end of 2014. The decline in headline inflation increases the already high pressure on the ECB and with 5Y5Y market-based inflation expectations trading below 1.6% for the first time since February, it could be that the ECB will announce more easing at the upcoming meeting on 22 October", argues Danske Bank.