Eurozone CPI was unchanged at 0.2% year-on-year in the flash reading for August. Consensus estimates were for the inflation rate to fall to 0.1%. Core CPI was also stronger-than-expected, coming in at 1.0% year-on-year, versus estimates of 0.9%. The core rate, which excludes food, energy and alcohol, was unchanged from July when it rose to a 16-month high.
Inflation in the Eurozone has been running below the European Central Bank’s 2% target since February 2013 and briefly flirted with deflation at the start of the year when annual CPI fell to -0.6%. After four months of falling prices, annual inflation was back in positive territory in May.
The biggest downward pressure during August came from energy, with the annual rate of decline accelerating to 7.1% from 5.6% in July. All other components are estimated to have risen from a year earlier, with food, alcohol and tobacco prices generating the biggest upward pressure along with services – rising by 1.2% in the 12 months to August.
In January, the European Central Bank (ECB) announced the expansion of its asset purchase program to include Eurozone government bonds, with purchases of up to €60 billion per month, in an effort to stave off deflation and boost sluggish growth. The ECB’s monetary stimulus appears to have succeeded in increasing lending and improving investor confidence across the Eurozone. Inflation expectations have also started to edge up from the lows seen at the beginning of the year.
The ECB is set to meet on Thursday for its latest monetary policy meeting where it may signal its readiness to expand its quantitative easing program on the face of new risks from global market volatility and a slowdown in China. Ongoing volatility in financial markets, as well as the euro’s recent gains against other majors may threaten the Eurozone’s tepid recovery. Slowing demand in China could also impact European exporters, while continued weakness in commodity prices threatens a new wave of deflation sweeping across the Eurozone.
The euro was slightly firmer after the data but still near the day’s lows. It edged up to 1.1207 against the dollar in mid-European session, and was up at 0.7274 against the pound. Against the yen, the euro was trading at 135.89.