Global Macro – European Inflation

The Euro Area flash estimate for its Harmonised Index of Consumer Prices (HICP) decelerated to 2.18% y/y in August from 2.58% in the prior month. HICP Overall, excluding Energy, accelerated to 2.75% y/y from 2.72%. The takeaway from those two series is that headline inflation did not get below the ECB target and consumer items outside of energy remain well above target, just as the energy component is more likely to reaccelerate toward the end of Q4 and into Q1. Without a meaningful decline in demand that results in significantly lower energy prices, the ECB will likely be deciding on next steps for its policy rate as Europe moves back into a rising inflation setup.

Source: Bloomberg.

Just a few days into September, the current end-of-month average price of Dutch TTF Natural Gas is at 39, a 10.2% increase from last year. From November into March, the comparison set for natural gas drops off from 47 to 26. Therefore, leveling off from here would result in y/y rate of change accelerations beginning in December. The end-of-month average price for Germany Electricity is at 91 EUR/MWh, a 6.3% decline from last year. While the comparison set is choppier, the trend from October through April is lower and is likely to provide a similar inflationary dynamic as natural gas.

Source: Macrobond.

The market is currently pricing in a 100% chance of a 25-basis point rate cut from the ECB at its September 12^th meeting and a 100% chance they cut by an additional 60 basis points by yearend. We will be monitoring how they discuss the inflation environment relative to their policy goals and continue to monitor trends in European energy prices.

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