Eurozone core inflation declines to 1% and becomes a bigger worry for ECB

Headline inflation remains elevated due to the energy price jump in the first half of the year, causing energy price growth to be 9.2% in August. This effect has started to slowly fade out of the inflation rate, meaning that inflation will slip below target in the months ahead. Core inflation is therefore much more interesting to look at. For a sustained higher inflation rate, it needs to move up, and the much-anticipated acceleration has so far failed to happen.

There is hope for higher core inflation though. Perhaps the most interesting data point to come out this summer was Eurozone negotiated wage growth, which jumped from 1.7% to 2.2% year on year in Q2. This significant acceleration brings wage growth to a pace last seen in 2012 and gives the first indication that the long labour market recovery is starting to lead to increasing wage pressures. Still, while concerns about the ECB being behind the curve have already been voiced, today’s core inflation reading suggests the contrary.