Inflation trends in the Euro area – Oct 2018

This post provides an inflation update for the Eurozone with numbers through September 2018. With various adverse scenarios (Brexit, Italian banks, trade war) looming at the horizon, risks to the economic outlook are arguably tilted to the downside. Monetary stimulus provided by the ECB (negative rates, …) is still at unprecedented levels and it is unclear (to me) whether the ECB has additional measures available in case any of the mentioned (or other) scenarios leads to an economic downturn. Policy normalization in the near future appears important to be able to suport the European economy in an adverse event. I therefore look at whether policy normalization can be justified from an inflation perspective.

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Eurozone inflation in September exceeded 2 percent, slightly higher than three months ago, and with somwhat higher price increases in the two biggest economies (France, Germany). While this might seem like policy normalization could be at the horizon, the headline inflation shown above is only one of several inflation measures typically considered. In particular, core inflation that excludes energy and food prices is still stubbornly low (see next graph), still close to 1 percent, and has even decreased slightly relative to three months ago.

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Price levels hence do not provide a clear message towards ending extraordinary monetary stimulus any time soon. I will leave the discussion of whether such normalization might be justified from a financial stability perspective for another time.