Eco Week

Pockets of inflation in a low inflation world


Despite an increase in June, core inflation in the eurozone remains stubbornly low. The dispersion is significant between countries and between the expenditure components of the price index. Inflation is low for clothing and footwear, furnishings and household equipment, transport and communications. It is higher for housing-related items, restaurants and hotels, miscellaneous goods and services and recreation and culture. Non-energy industrial goods price inflation is very low. Should this continue, it would imply that the acceleration of inflation which is the ECB is pursuing by renewed policy easing, has to come from services. However, research shows that it takes more time for services prices to respond to monetary policy and economic activity. Monetary accomodation is here to stay.

In June, the annual inflation rate for the eurozone was 1.3%. Core inflation –which excludes energy, alcohol, food and tobacco- rose to 1.1%, from 0.8% in May. Since the start of the year, it has been fluctuating between 0.8% and 1.3%. Both inflation measures remain well below the objective of the ECB, which is to have, over the medium term, a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) below but close to 2%.

Yet, the average hides considerable dispersion, which has a large impact on national real interest rates. As shown in chart 1, five countries have inflation of 2% or more but five countries, among which France and Italy, are below 1.0%. In Germany, despite massive bottlenecks, core inflation is only 1.5%.