Euro area’s core inflation remains low in August, headline rate unchanged at 1 pct

Euro area’s core inflation remained at a low pace of 0.9 percent in August. However, the underlying inflation has risen slightly in recent months. The headline inflation rate stayed the same at 1 percent. The core inflation is well below the target rate of ECB.

Nevertheless, core inflation is currently somewhat distorted by special effects. The holiday-related price rise for package holidays at Easter and Whitsun in 2019 dropped in April and June and not in March and May as in 2018. Moreover, the method of calculating prices for package holidays in Germany has changed, and the corresponding indices were recalculated until 2015.

On the contrary, a methodologically related adjustment of the weights in the harmonised consumer price index was not carried out for previous years. This distorts the core rate downwards by 0.2 percentage points in July and August. This special effect might slowly wane by December, noted Commerzbank in a research report.

Therefore, a core rate excluding package holidays currently better reflects underlying inflation. This has increased a bit in recent months. It seems that companies are currently succeeding in passing on some of the higher wage costs to consumers. However, given the soft economy, it is questionable whether this trend would last.

“Nevertheless, today's price data should continue to dampen inflation expectations in the market. The headline inflation rate also remained unchanged at 1.0 percent in August, well below the ECB's inflation target of just under 2 percent. We assume that the ECB will continue to ease monetary policy in September”, added Commerzbank.