The pandemic is distorting euro area inflation data, but today's final HICP report provides another brutal reality check for the ECB - a thread with charts.
To add insult to injury, core inflation was revised even lower in September, from 0.24% to 0.22% YoY, its lowest level ever.
The main exogeneous drivers of the decline in core inflation are well-known (German VAT; summer sales in FR/IT) but excluding these, the trend continued to deteriorate. Every single metrics of underlying consumer prices declined in September, with no exception.
Super core inflation rates are falling, after having recovered for more than three years.
Momentum and trimmed inflation measures are collapsing.
The share of HICP goods and services in positive territory has collapsed to an all-time low of 60%.
In the end, the deterioration in the inflation outlook requires further stimulus. And that was the case before the resurgence in Covid-19 cases.

ECB's Panetta: "the risks of a policy overreaction are much smaller than the risks of policy being too slow or too shy".

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More from @fwred

12 Oct
A few highlights from this excellent interview with ECB Chief economist Philip Lane, who's essentially previewing the ECB's next decision. (1/n)…
Number of mentions in Lane's interview:
"uncertainty": 11 times
"fiscal": 16 times

That's all you need to know about the ECB's outlook right now. (2/n)
Lane says (about 7 times) that the ECB will be more data dependent than usual going into the next meetings. "We’re going to get a lot of information [about the fiscal plans, the pandemic, growth/inflation, FX, oil prices]".
By December, the ECB should have made a decision. (3/n)
Read 7 tweets
23 Sep
ECB's Executive Board member Yves Mersch's interview is worth reading in full.
Unsurprisingly hawkish, including a couple of worrying signals, but still data-dependent. Upcoming data and staff projections will likely force the hawks' hand. (1/n)…
Does Mersch has a message to send to his Italian colleague on the Exectuive Board?
"So uncertainty remains. It is no reason to be only intelligent if you are more pessimistic than the one who spoke before you. There is no reason to be complacent." (2/n)
Mersch sounding overly optimistic on growth, if not delusional. "Looking at new incoming information I think nothing is pointing to a further deterioration. [...] with chances to come out a bit closer to the upward scenario if the health situation is not deteriorating." (3/n)
Read 7 tweets
22 Sep
Important speech from @ecb's Fabio Panetta: "There is a strong case for our reaction function to be asymmetric, as the risks of a policy overreaction are much smaller than the risks of policy being too slow or too shy to react." (1/n)…
It's increasingly clear that some divergence in views has emerged among EB/GC members. Panetta adds a personal touch to his very dovish remarks today, joining forces with ECB Chief economist Philip Lane and his two-stage approach. (2/n)
It's also clear what Panetta and Lane will advocate.
"The outlook we face is not satisfactory yet."
"If we encounter shocks that pose additional threats to price stability, our reaction function is clearly spelled out: a policy response is necessary and forthcoming." (3/n)
Read 5 tweets
17 Sep
Euro area core HICP inflation was revised even lower, to 0.37% YoY in august, a record low.
A few charts illustrating the underlying trend in consumer prices, with the usual caveat that covid-19 and temporary factors (German VAT cut; summer sales) are adding a lot of noise. (1/n) Image
There's a long list of temporary drags on core inflation indeed. The @ecb can try and look through them for as long as possible. But there's no escaping the early disinflationary effects of the crisis, even before labour market scars become a problem. (2/n) Image
For all the noise in the data, most gauges of underlying inflation are trending down, in some cases very sharply. Momentum, trimmed means, volatility weighted measures all down to multi-year lows. (3/n) Image
Read 5 tweets
11 Sep
It would have been great to start yesterday's statement by Philip Lane's introductory remark in today's blog: "there is no room for complacency".
It would have been great to make this important point about inflation when discussing the August HICP print: "underlying price pressures have weakened due to subdued demand and the scale of labour market slack".
It would have been great to be more straightforward when it comes to the implications of EUR appreciation: "the recent appreciation of the euro exchange rate dampens the inflation outlook".
Read 6 tweets
31 Aug
Surprisingly hawkish comments from @Isabel_Schnabel. At the very least the timing looks a bit odd to me, ahead of tomorrow's inflation shocker, renewed growth concerns and EUR strength. But, there are some important caveats... (1/n)
.@Isabel_Schnabel says there is "no reason to adjust the monetary stance" and "less of a need to deviate from the capital key", which sounds less cautious than Philip Lane's "two stage" approach. (2/n)
But @Isabel_Schnabel also insists on the ECB's assumptions:
"as long as the baseline scenario remains intact"
"at the moment, the baseline continues to look plausible"
"but let’s wait for the ECB staff projections"

Well, the baseline scenario will soon be challenged. (3/n)
Read 5 tweets

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