Eurozone core inflation drops below 1 percent two days before ECB meeting

04.06.2019 12:47|Forex conotoxia.com

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Two days before the Thursday meeting and the decision of the European Central Bank, preliminary inflation data in May in the euro zone were published. It seems that they may exert additional pressure on the ECB, because neither economic data nor inflation indicate a rebound.

In times of economic uncertainty and increased fears of recession, prices in the euro area in May in annual terms increased by only 1.2 percent. This is the lowest level of inflation since April last year, mainly due to the fall in energy and services prices. Meanwhile, the annual core inflation, which excludes volatile prices for energy, food, alcohol and tobacco, has probably dropped to 0.8 percent. in May from 1.3 percent in last month.

These are further data that may be a problem for the European Central Bank, indicating that further incentives are needed to revive the European economy and raise inflation. The current inflation reading takes place at a time when the labor market is strong and theoretically should exert pressure on price increases. The unemployment rate in the euro area has recently fallen to the lowest level since 2008, to 7.6 percent. This should translate into an increase in wage pressure, and this in turn on inflation. However, at present, not only the ECB has a problem with a strong labor market and low inflation. In fact, this phenomenon is common in the world.

Nevertheless, entrepreneurs in an environment of greater economic uncertainty seem to prefer higher costs of manufacturing goods and services, including higher labor costs, amortizing with the decrease in profit, rather than passing on the consumer and raising prices. In other words, companies prefer to achieve lower profits than to increase the prices of their products, which could translate into a drop in demand. Such an attitude is theoretically unfavorable for the stock market, because it means a drop in profits, and this may mean a drop in the valuation of enterprises.

It seems, therefore, that on Thursday the European Central Bank may sound more dovish, because the only good data that appeared in recent times has shown an increase in lending to households and enterprises. However, this may not be enough for the situation to improve at this point.

 

Daniel Kostecki, Chief Analyst Conotoxia Ltd.

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