Euro area core inflation rate drops in August, unlikely to rise above 1 pct until 2019

Euro area’s core inflation decelerated in the month of August. The headline consumer price inflation came in at 2 percent in the month, a slowdown from 2.1 percent in the prior month.

The core rate, which excludes energy, food, alcohol and tobacco, dropped to 1 percent on a year-on-year basis, as compared with consensus expectations of 1.1 percent. Therefore, the rise to 1.1 percent seen in July once again proved unsustainable. Since the start of 2018, the pace has commuted by 1 percent. This increases the possibility that the European Central Bank will again have to lower its forecast for the core inflation rate in 2018 from the current 1.1 percent.

Nevertheless, the data released today is unlikely to worry the ECB. Its current focus is more on wage indicators, which recently hinted at a stronger wage growth. Their calculations show that collective wages in euro area were up 2.2 percent year-on-year in the second quarter of this year. In 2017, collective wages rose just 1.5 percent year-on-year.

Given the solid demand for labor, wages are expected to rise even more strongly in the months ahead. Nevertheless, it usually takes some time before the stronger wag rise has an effect on consumer prices. Therefore, the core rate is unlikely to rise above 1 percent on a sustained basis until 2019, although a weaker upward trend than the ECB is expected, stated Commerzbank in a research report.

“At 2.0 percent (July: 2.1 percent), the headline inflation rate remains close to the ECB's target of below but close to 2 percent. Due to the development of energy prices, however, the inflation rate is likely to fall well below 2 percent again in the coming months”, added Commerzbank.

At 10:00 GMT the FxWirePro's Hourly Strength Index of Euro was neutral at -44.4353, while the FxWirePro's Hourly Strength Index of US Dollar was neutral at 22.4609. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex