Euro-area inflation rate likely to zero in next month

In August, the Euro-area headline inflation rate remained at 0.2% y/y, according to the flash estimate, despite the steep drop in oil prices. The core rate (ex food, energy, alcohol, tobacco) remained at 1% y/y. All in all, inflation pressures are still very low.

Talk about an increased risk of deflation (in the bad sense of the word) is unjustified in economic terms. Lower oil prices mean a lower energy bill and more money left to spend on other things such as cars. There is actually a clear inverse relationship between the inflation rate and households' willingness to make major purchases. If anything, the drop in energy prices will strengthen the recovery over the medium term. For September and October, the headline rate is expected to close to zero before base effects kick in, leading the rate closer to 1% by the turn of the year, foresees Nordea Bank.