Euro area core inflation decelerates in August on volatile package holidays prices

The euro area core inflation slowed down in August owing to notoriously volatile package holidays prices. This appears to be temporary. Final euro area HICP inflation figures affirmed the flash estimate for core inflation of 0.2 percent on a sequential basis and 1 percent on a year-on-year basis. Final figures rarely surprise and move the markets.

The effect of package holidays is likely to be reversed in September, noted Nordea Bank in a research report. Prices of education also slowed down the core rate in August. German education prices dropped 5 percent in the month, which is likely to be a lasting impact, lowering super-core inflation by 0.1 percentage points and offsetting partially the base effects for October from falling Italian education prices a year earlier.

The upward momentum is waning in underlying inflation. In August, super-core inflation came in at 1.1 percent year-on-year when excluding package holidays, down from 1.2 percent year-on-year in July, and around the same in percent three-month-on-three-month.

Nation details indicated that Germany is pulling lower due mostly to falling education prices, while French super-core inflation continues to be low.

Core inflation is likely to accelerate gradually in 2019-2020, noted Nordea Bank in a research report. The main contributor to the future inflation is expected to be higher labor costs. In the second quarter of 2018, labor compensation was up 2.3 percent year-on-year. Although a part of the acceleration is because of temporary factors such as higher public sector wages in Italy, it is noteworthy that wage increases are becoming larger in most euro area nations.

“Thus, it seems that the tightening of labour market is now taking wages higher and while a part of the increases can be compensated by productivity increases, we expect them to feed also core inflation”, added Nordea Bank.

At 12:00 GMT the FxWirePro's Hourly Strength Index of Euro was neutral at 3.19593, while the FxWirePro's Hourly Strength Index of US Dollar was highly bearish at -105.2. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex