Eurozone inflation (CPI) eased to 1.8% in September, below the ECB’s target of 2% Preliminary data from statistics agency Eurostat showed on Tuesday that inflation in the euro area fell to 1.8% in September, below the European Central Bank’s target of 2.%.
The reading was in line with economists polled by Reuters, after annual inflation hit a three-year low of 2.2 percent in August.
Core inflation, which excludes more volatile energy, food, alcohol and tobacco prices, was 2.7%. It was expected to remain unchanged from August’s reading of 2.8%. Inflation in the euro zone’s services sector eased to 4% in September, down from 4.1% in August.
The figures come after inflation in September fell below the ECB’s 2% target in several key eurozone economies, including France and Germany. Preliminary data showed on Monday that the harmonized inflation rate in Europe’s leading economy fell more than expected to 1.8% year-on-year. Meanwhile, Bert Kollen, chief economist in the Netherlands at ING, noted that the recovery of renewed inflation is also not entirely certain.
Franziska Palmas, chief European economist at Capital Economics, said in a note on Tuesday that while there may be a “temporary recovery” in inflation in the coming months, the headline reading is likely to remain below 2% next year. Meanwhile, Bert Kollen, chief economist in the Netherlands at ING, noted that the recovery of renewed inflation is also not entirely certain..
“While a recovery was expected in the fourth quarter, the question is to what extent this can be achieved as gasoline prices fell rapidly on the back of lower oil prices.”.
The importance of estimating the CPI and its impact on the markets
The year-on-year CPI estimate is a preliminary measure of inflation that tracks changes in the price level of a basket of consumer goods and services over the past year. Here is an overview of its importance and features:
Main characteristics
Monthly Edition:
The CPI estimate is usually released on a monthly basis, providing an early indication of inflation trends before the final CPI figures are published.
Coverage:
The estimate covers a wide range of consumer goods and services, including food, housing, clothing, transportation and healthcare.
Purpose:
Measuring inflation: The primary purpose is to measure inflationary pressures in the economy. It helps assess the cost of living and changes in the purchasing power of consumers.
Market Impact:
Investor sentiment: A higher-than-expected monthly CPI estimate can lead to concerns about rising inflation, prompting investors to adjust their portfolios, often leading to declines in equity markets.
Bond Markets: Rising inflation expectations can lead to higher interest rates; consequently, this affects bond yields and prices. As a result, investors may sell bonds in anticipation of monetary policy tightening.
Currency Markets: Moreover, positive inflation data may strengthen the currency, as it indicates a possible tightening of monetary policy by central banks. Thus, traders could react by adjusting their positions in favor of the stronger currency.
Economic Forecasts:
Flash’s estimate provides early insights that not only help economists and policymakers gauge inflation prospects but also enable them to make informed monetary policy decisions.
Moreover, Flash’s year-on-year CPI estimate serves as a critical economic indicator that significantly influences financial markets by offering early signals of inflation trends. Consequently, it significantly influences monetary policy decisions and market expectations, which leads investors, economists, and policymakers to closely monitor it.
ECB Strategies to Counter High Inflation (CPI)
The ECB typically responds to rising inflation through a variety of monetary policy tools and strategies. Here’s how the ECB typically deals with inflationary pressures:
1. Interest Rate Adjustments
Raising interest rates: The primary tool to combat inflation is to adjust key interest rates. When inflation rises above the ECB’s target (usually around 2%), the ECB may increase key interest rates to make borrowing more expensive.
Impact on loans: Higher prices can increase loan costs, which can slow investment and consumption, helping to mitigate inflation.
2. Quantitative easing (tapering)
Scaling back asset purchases: If the ECB is engaged in quantitative easing (QE), which involves buying assets to inject liquidity into the economy, it may slow or reduce these purchases in response to rising inflation. This reduces monetary stimulus in the economy and can help calm inflationary pressures.
3. Pre-Orientation
Communicating Future Policy Intentions: The ECB often employs advance guidance to effectively inform markets and the public about its future policy intentions. For instance, by referring to potential interest rate hikes or changes in monetary policy, the ECB can shape expectations and consequently influence economic behavior.
4. Reserve requirements
Adjustment of reserve ratios: The ECB can increase reserve requirements for banks, which means that banks must hold a larger proportion of deposits as reserves. This reduces the amount of money available for lending, thereby tightening monetary conditions.
5. Monitoring Economic Indicators
Data-driven Approach: The ECB closely monitors various economic indicators, including inflation rates, employment figures, and economic growth data, to inform its policy decisions. Consequently, if inflation persists, the ECB may take more aggressive action.
Moreover, the ECB’s response to rising inflation typically includes a combination of interest-rate adjustments, tapering asset purchases, and effective communication strategies. Ultimately, the goal is to maintain price stability while supporting sustainable economic growth.
