Euro area flash headline inflation accelerates slightly in September, core rate slows down

The flash headline inflation in euro area accelerated again in September. On a year-on-year basis, euro area inflation rose to 2.1 percent in the month, close to the ECB target of just under 2 percent for the fifth consecutive month. Nevertheless, the higher inflation is greatly linked to the sharp rise in energy and food prices. The core inflation rate dropped a bit to 0.94 percent from 0.96 percent.

The fall in core inflation rate, which excludes energy, food, alcohol and tobacco is unexpected. Nevertheless, the decline is smaller than it seems at first glance. The core rate of 1.1 percent anticipated by the ECB for 2018 could thus hardly be achieved in arithmetical terms.

However, the rise in core rate has probably just been postponed. This is due to wages, which have a significant role in underlying inflation. In recent times, wages have risen noticeably. Given the strong demand for labor, which according to the firms is increasingly difficult to cover, wages are expected to rise even more robustly in the quarters ahead, noted Commerzbank in a research report.

Nevertheless, it is likely to be some time before the stronger wage rise has an impact on consumer prices. Currently, firms can still compensate for the increased wage costs with productivity gains.

“We assume that the core rate will not rise above 1 percent sustainably until 2019. At 1.3 percent, however, the increase is likely to be weaker than currently forecast by the ECB (1.5 percent)”, said Commerzbank.

Given the development of energy prices, the headline inflation rate is expected to fall below 2 percent again in the months ahead. The annual average inflation is likely to reach 1.4 percent in 2019 after an expected 1.7 percent in 2018, added Commerzbank.

At 11:00 GMT the FxWirePro's Hourly Strength Index of Euro was highly bearish at -147.221, while the FxWirePro's Hourly Strength Index of US Dollar was highly bullish at 144.248. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex