Euro area headline inflation slows slightly in February, core rate unchanged

The euro area consumer price inflation slowed slightly on a year-on-year basis in the month of February. The inflation rate covering all goods dropped back to 1.2 percent in the midst of lower energy prices. In spite of solid economic growth and notably lower unemployment, there is no sign of stronger underlying inflation in the euro area, noted Commerzbank in a research report.

Core inflation rate remained at 1 percent in the month, as anticipated. The rate is likely to rise temporarily in the month of March because of seasonal effects as the early timing of Easter would signify that the usual rise of prices for package holidays would be in March 2018 and not in April like in 2017.

But the pace should continue to linger around 1 percent over the remainder of the year. The main factor here is the persistently subdued wage growth, which has not risen markedly in spite of decline in the employment rate from 12.1 percent at its peak to 8.7 percent lately.

This is firstly due to the fall of unemployment is essentially in Spain and other periphery nations, where unemployment is still quite high. Unemployment there would have to retreat much further before these nations experience stronger wage growth, stated Commerzbank. Secondly, due to globalization and rising digitalization, wages react much more slowly today to falling unemployment than they used to. The inflation rate covering all goods fell to 1.2 percent in February due to lower energy prices.

But this should be the low point for this year as the sharp decline in prices of energy in spring of 2017 would no longer be in the year-on-year comparison in the months ahead.

“We expect an inflation rate of 2 percent in the summer. For the ECB, this would make it easier to justify ceasing its asset purchase programme at the end of 2018”, added Commerzbank.

At 13:00 GMT the FxWirePro's Hourly Strength Index of Euro was neutral at -26.2133, while the FxWirePro's Hourly Strength Index of US Dollar was slightly bullish at 54.3602. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex

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