Eurozone: CPI to pick up in Sep, surveys still signal tepid Q3 – RBS

Anna Tokar, Research Analyst at RBS, suggests that a set of Q3 PMI results, including the recent  flash numbers, signal a modest slowdown in Eurozone activity in Q3 which would be consistent with relatively weak hard activity data post Brexit.

Key Quotes

“In the week ahead, the preliminary September CPI and the German Ifo survey will be the focus. We expect headline inflation to pick up to 0.4% y/y on energy base effects, but core to remain subdued at 0.8% y/y. For the Ifo survey, we expect a modest pick-up in line with the uptick in German manufacturing PMI.

We expect the composite Ifo business climate index to pick up slightly to 106.6 in September from 106.2 in August. Both components of the Ifo, current situation and expectations, deteriorated notably in August, neutralising gains in business confidence since the beginning of the year. We think a small rebound is likely in September, given the uptick in (flash) German manufacturing PMI and marginal improvements in the Eurozone Sentix. That said, lingering uncertainties related to Brexit and heightened political uncertainty following the regional German elections, mean that we expect data momentum to continue to decline, longer term.

In September, we expect Euro Area headline inflation to pick up to 0.4% y/y from 0.2%, driven by energy base effects. As the weekly wholesale petrol & diesel price data indicate, fuel prices are set for monthly and yearly gains in September. This suggests a notable reduction in transport price deflation this month (given the available fuel price data, we expect the transport CPI component at about -0.3% y/y vs. -1.7% y/y in August). By contrast, the July spike in food prices is likely to continue to unwind gradually - we expect food price inflation at 1.0% in September, down from 1.1% a month ago.

At the core level, we do not expect any significant changes in September vs. August. We forecast core CPI to remain at 0.8% y/y. The risks appear to be skewed to the upside- August’s outturn was a ‘high’ 0.8% (0.82%). Core inflation has been range-bound recently, hovering between 0.8% and 1.0% y/y for most of the past year. If the volatile package holiday component is removed, core inflation has in fact been edging down this year- from 1.0% y/y in January to 0.8% in August (chart above). We expect this trend to continue in the medium-term and forecast core inflation to average 0.7% y/y in 2017.”