Eurozone disinflation continues, despite Olympics boost to services

Goods and energy drive inflation decline…

The details showed one-offs in energy and services largely offsetting one another. As expected, the main drag on inflation came from energy, with petrol pump prices having declined around 2.5% m/m in August. This was flattered still further by the high base in August; petrol prices were around 8% higher this time last year. However, we also saw further weakness in goods inflation, with prices unchanged on the month on a seasonally adjusted basis, and up only 0.4% y/y – the weakest reading for goods inflation since December 2020. Goods inflation is being weighed by the continued pass-through of earlier falls in energy prices, but the weak demand environment for goods – with retail volumes in the eurozone still broadly stagnant – is likely a contributing factor. For energy inflation, base effects are likely to keep this category weak in September, but this base effect will be less favourable in the final months of 2024, pushing headline inflation back up to around the mid-2s.

…amid events-fueled services strength

In contrast to drags from energy and goods, services inflation actually picked up in August, to 4.2% y/y from 4% in July. The main culprit was France, where services inflation jumped to 3.1% from 2.6%. While we do not yet have the full details, INSEE reported that this was driven by ‘accommodation and transport services’ – something we suspect was linked to the Olympics. Indeed, as we flagged in our June Global Monthly, services inflation may have seen more generalised support from the swathe of summer cultural events in the eurozone, which also include the European Championship (Euro 2024) and the Taylor Swift tour. As we noted in June, this boost is likely to prove fleeting, and we expect to see payback in the September inflation data. With that said, and looking through the monthly volatility, underlying services inflation remains elevated due to continued strong wage growth and solid demand. As such, although we see services inflation edging lower in the very near-term on payback effects, price growth is likely to remain elevated for the time being.

ECB still likely to forge ahead with September cut

All told, today’s report was probably neutral for the ECB and consistent with its forecast. Doves will take comfort from the continued subdued goods inflation, while hawks will point to continued elevated services inflation as an upside risk. But given disinflation is broadly continuing, and leading indicators for wage growth are pointing south, we think the Governing Council will be comfortable forging ahead with another rate cut in September. Subsequently, we expect consecutive rate cuts at each ECB meeting until the deposit rate reaches 1.5% later in 2025. (Bill Diviney)

The Netherlands: Strong services means long grind lower in inflation

August inflation (CPI) fell to 3.6% y/y, thereby marginally declining from the elevated July figure (3.7% y/y); in line with our expectations. The HICP came in at 3.3% y/y, down from 3.5% in July. Compared to July, the prices of industrial goods and energy declined (more sharply), which pushed down the inflation rate. The drop in industrial goods may be related to the weaker demand for goods that we see in the broader eurozone. On the other hand, food and services inflation edged up. Food prices may be experiencing the delayed effects of the excise tax hike on tobacco. Services prices are mainly driven by higher housing rent indexation – which causes an upward adjustment of our services inflation forecasts for the 11 months following July – and high wage growth. This means that core inflation is still elevated. We have updated our inflation forecasts to reflect these developments. We now expect CPI inflation to average 3.2% in 2024 (was 2.7%) and 2.9% (was 2.2%) in 2025, thereby staying above the 2% target of the ECB. (Aggie van Huisseling, Jan-Paul van de Kerke)