Eurozone core inflation perks up

Core consumer price inflation in the euro area unexpectedly picked up this month, according to data released on Wednesday.

The consumer price index rose to 2.2% in October from 2.1% the months before, as expected, as energy inflation powered higher and core prices grew, only partly offset by a decline in food inflation..

Core CPI, which excludes more volatile prices such as fuel, food, alcohol and tobacco, climbed to 1.1% from 0.9%, even stronger than the 1.0% that the market had expected. Core prices were higher in services and in non-energy goods.

That is still a low level of core inflation but is above the average for the past year and the European Central Bank expects it will rise further, as do businesses and consumers, according to recent surveys.

"October’s increase in euro-zone inflation supports the ECB’s judgement that underlying price pressures are gradually building despite the slowdown in activity over recent months," said economist Jennifer McKeown at Capital Economics.

Although data on Tuesday showed eurozone economic growth slowed to its weakest quarterly rate in four years, there were indication that temporary delays in car production were to blame.

With the unemployment around 10-year lows, supporting other indications that the economy is still in "pretty good health", McKeown said, the recent tentative upward trend in wage growth "should continue" and underlying price pressures "should gradually increase even as falling energy inflation drags the headline rate down somewhat".

Claus Vistesen at Pantheon Macroeconomics said the ECB will be "relieved" to see the CPI numbers, "even though it doesn’t resolve the dilemma on how to balance a headline inflation above the official target with still-low core inflation".

He thinks the core rate will rise further in coming months, hitting 1.3% at the end of Q1 and that the ECB is being "too optimistic in its core inflation forecasts for next year, but this probably doesn’t mean much for the overall policy path".

"Unless the sky falls in, rates will slowly begin to rise in the latter part of next year, even if the core rate remains well off 2%, especially if the headline rate stays elevated."

McKeown sees the ECB ending the asset purchases element of its quantitative easing programme in December and does not expect the recent slowdown in activity to cause it to alter its forward guidance. "While most forecasters have pushed back their expectations for the first rate hike, we are still pencilling in an increase in September 2019."

Barclays felt it was a "core correction rather than a gear shift" and continues to see a modest increase in core inflation ahead.

"We do not take the increase as a signal that core inflation acceleration is round the corner. In fact, we think volatile core components were largely responsible for the rise of tradable and non-tradable prices."

Barclays continue to see underlying inflation improving through the forecast horizon, but do not anticipate a non-linear acceleration in the very near term.

"Labour market slack remains wide. Despite the ongoing decline in the unemployment rate, the euro area labour force participation rate is on a rising trend, driven by women and the elderly, suggesting that increasing availability of workers in the job market will likely act as a drag on future wage inflation expansion."