Euro area inflation outlook under the microscope

Headline HICP inflation fell from +3.0% at the end of 2011 to -0.6% in January 2015, before rebounding to +0.2% in June. Despite showing signs of improvement lately, core prices remained very weak, edging down to 0.8% from 0.9% previously. The recent upward trend in headline inflation was led almost entirely by non-core prices: energy inflation rose from -9.3% in January to -5.1% in June, and food inflation rose to +0.8%, from -0.7% in January. 

At the core level, NEIG prices have been increasing slowly, while services prices remain depressed. NEIG inflation rose to +0.3% in June after hovering around -0.1% in Q4 last year, while services inflation fell back to +1.1%, close to the all-time lows reached in March and April (+1.0%). Goods inflation has contributed almost the entire headline consumer prices change since the start of the year (+0.8pp in total). Volatile components provided the largest support to headline inflation: energy prices contributed +0.44pp between January and June, while food inflation added about +0.25pp. NEIG prices support was more modest (+0.1pp). 

Services prices support was instead almost negligible (+0.02). Digging further into the NEIG component, slightly more than half of the contribution was provided by the durable goods component. Durable goods prices rose to 0.0% y/y in June from -0.8% in January, contributing 0.06pp, while semi- and non-durables prices increased to 0.0% and +0.9% from -0.2% and +0.6%, respectively, supporting headline inflation by 0.05pp in total. 

Meanwhile, within food prices, the bulk of the support was led by unprocessed food prices, while processed food inflation was almost absent. Fresh food prices rose to +1.9% in June from -0.8% in January, contributing 0.2pp to headline inflation, while processed food inflation was broadly unchanged at -0.3% in June, making roughly zero contribution.