slows down but victory is still far away

This week they arrived comforting data on the inflation fronton both sides of the Atlantic, suggesting that continued interest rate increases by the European Central Bank and of Federal Reserve are managing to slow down the increase in prices

Inflation down in the EU

On Friday it emerged that theeuro area inflation fell more than expected in Septemberat 4.3% on an annual basis (+0.3% m/m) from 5.2% in August, according to the flash reading published by Eurostat; the data represents a minimum since October 2021. Further good news continues to come from the indices net of the most volatile components, which also fell more than consensus expectations: the core ECB index (net of energy and fresh food) fell for the sixth time to 5.5% (0.2% m/m) from 6.2% previously, a minimum for over a year, while inflation excluding food, energy, alcohol and tobacco – observed by the ECB as the best indicator of the underlying trend – fell to 4.5% from 5.3%, the largest drop since August 2020.

Still a long road

The road has been long and complex, but at least the decline in inflation in the eurozone was more significant than expected,” commented Ulrike KastensEuropean Economist of DWSadding that “all in all, there are many elements that suggest that the inflation rate will stabilize between 3 and 3.5% by the end of the year“. Despite the optimism, “it’s too early to declare victory – he underlined – Price pressures are likely to remain high, especially on the prices of services, given the high intensity of labor costs. Furthermore, the increase in administered prices will persist until 2024, so the 2% inflation target will probably not be reached in 2024.”

Italy more sacrificed

In Italy, in contrast with the main economies of the euro area, inflation is fell less than expectedpassing to 5.3% from 5.4% of August on the national index, and grew (against expectations of a decline) to 5.7% from 5.5% on the harmonized

“Italian inflation will decline in the final months of the year due to favorable base effects on energy component but probably less than expected – commented Aniello Dell’Anno, economist for the euro area of Intesa Sanpaolo – On Thursday, ARERA announced an increase in electricity bill in the protected market of +18.6% in the fourth quarter, while the anti-inflation pact promoted by the government may not be sufficient to significantly slow down the trend growth in prices. In perspective, inflation could stand at 3% (on the CPI) at the end of the year, and drop, temporarily, just under 2% only at the beginning of 2025. The index net of fresh food and energy is estimated at 3.8% at the end of 2023 and 2.3% in December 2024.”

USA already close to stabilizing rates

Again on Friday, data that gives rise to hope also arrived from the sources United States. Excluding volatile food and energy components, the PCE price index gained 0.1% in August, after rising 0.2% in July. The so-called core PCE price index – much observed by the FED – increased by 3.9% on a yearly basis in August, at a level lower than the previous month’s 4.3%.. The US central bank actually takes PCE price indices into account to reach its inflation target of 2%. Last week the FED kept interest rates steady, but strengthened its “hawkish” monetary policy orientation.

“The Fed’s preferred measure of inflation came in lower than expected and has strengthened the thesis that the Fed will not increase rates in the current quarter – commented James Knightley, Chief International Economist at ING – But the huge upward revisions to household savings suggest that consumers may remain more resilient than we thought and support the case for the Fed to maintain tighter monetary policy for longer” .