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 (consensus 0.0%, Danske Bank -0.2%). Core inflation was unchanged at 0.9% y/y in September (consensus 0.9%, Danske Bank 0.8%).
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.
Core inflation remained unchanged at 0.9% y/y as service price inflation (60% of core inflation) increased to 1.3% y/y from 1.2% y/y in August and non-energy industrial goods (40% of core inflation) declined to 0.3% y/y from 0.4% y/y. We had expected a larger decline in goods price inflation but the lagged impact from the weaker effective euro still seems to be supportive. We see downside risk to our forecast 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.
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