Haver Analytics
Haver Analytics
Europe
| Oct 31 2024

Oil Drives EMU Inflation for the Target as the Core Gets Sticky

Inflation in the European Monetary Union turned flat in September with the headline flat and the core flat month-to-month. Over 12 months, headline inflation is rising at a 1.7% annual rate, the same as over six months; over three months, that pace steps down to 1.6%. Headline inflation is across the board consistent with the European central bank’s target of inflation of around 2%. Core inflation is higher. Over 12 months, the core runs hot at a 2.8% pace, rising over six months at a stronger 3.2% annual rate and then dipping to a 2.3% annual rate over three months. The three-month pace is coming much closer to the ECB's target for inflation.

The four largest economies in the EMU also had inflation fall in September. In Germany, prices dropped by 0.2%, the same as in Spain. Headline prices fell 0.7% in France and just ticked lower by 0.1% in Italy. Price dropping across the board is a special sign; in this case, it signals dropping oil prices.

Sequential inflation rates for headline inflation in large economies also are looking good. Germany and Spain have the highest 12-month inflation rates at 1.7%. France is next at 1.4% and then Italy logs a 0.7% 12-month inflation rate. However, over six months, inflation picks up above target for Italy and Germany to 2.7%; it cruises at a 1.9% annual rate in France and at 1% annual rate in Spain. Over three months, prices are flat in Germany, rising at a 0.2% annual rate in France, rising at a 0.3% annual rate in Spain, and rising at a 2.3% annual rate in Italy. The results we see for headline inflation clearly echoed across the large economies of the European Monetary Union.

However, as having been the case for some time, the sticking point for inflation is the core. This is because Brent oil prices fell by 8.1% in September and fell by 7.6% in August after rising by 0.1% in July. In fact, Brent oil prices are falling to a 47.7% annual rate over three months, falling at a 29.3% annual rate over six months, and falling at a 24% annual rate over 12 months. This helps to explain why headline inflation is doing so well. Core inflation is showing more signs of being stuck at a too-high level.

Core (ex-energy) inflation in the case of Germany is at a 2.6% annual rate over 12 months. Spain’s core pace is at a 2.4% annual rate, Italy logs a 1.9% annual rate, and France checks in at a 1.5% annual rate. For France and Italy, core inflation over 12 months is very much in the fold of the target pace, while in the case of Spain and Germany, the departures aren't so great as they both hover around 2.5% at an annual rate. However over six months, German inflation is still up by 2.4%, the same as in Italy. Spain logs in at a 2.2% annual rate. France stays with the low 1.5% annual rate. Over three months, inflation runs at a 2.8% annual rate for ex-energy in Germany; it's at a 2.4% annual rate for the core in Spain and 2.1% for the core in Italy, compared to an even weaker 0.4% annual rate in France.

Even with core inflation getting stuck in the EMU economy overall at 2.8%, inflation is still not very far from the ECB's goal and is broadly behaving for the large economies. And if economic data are deemed weak enough, inflation doesn't seem to be that far from the ECB's target nor is it misbehaving enough to keep ECB rate cuts off the table.

  • Robert A. Brusca is Chief Economist of Fact and Opinion Economics, a consulting firm he founded in Manhattan. He has been an economist on Wall Street for over 25 years. He has visited central banking and large institutional clients in over 30 countries in his career as an economist. Mr. Brusca was a Divisional Research Chief at the Federal Reserve Bank of NY (Chief of the International Financial markets Division), a Fed Watcher at Irving Trust and Chief Economist at Nikko Securities International. He is widely quoted and appears in various media.   Mr. Brusca holds an MA and Ph.D. in economics from Michigan State University and a BA in Economics from the University of Michigan. His research pursues his strong interests in non aligned policy economics as well as international economics. FAO Economics’ research targets investors to assist them in making better investment decisions in stocks, bonds and in a variety of international assets. The company does not manage money and has no conflicts in giving economic advice.

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