Eurozone: Inflation rises on energy and base effects allowing ECB to stick to its narrative – Nordea Markets

The preliminary reading showed inflation in the Eurozone rose to 3.4% (YoY) in September. Analysts at Nordea Markets explained that energy prices and base effects were the main reasons, allowing the European Central Bank (ECB) to stick to its transitory narrative.

Key Quotes: 

“Inflation increased to 3.4% y/y in September according to the EuroStat flash estimate, up from 3.0% y/y in August. Energy prices are 17.4% higher than a year ago, contributing 1.5% points to the high headline reading, but core is also taking off and hit 1.x9 y/y, up from 1.6% y/y. Base effects from last year’s German VAT cut will keep core inflation higher for the rest of the year and we expect core inflation to be somewhat lower come January, while supply constraints could keep energy prices elevated for some time.”

“The ECB will most likely stick to its transitory narrative – repeated by President Lagarde in recent days – even if the hawks will be rattling their sabres as long as headline numbers remain this high. The central bank should still be welcoming higher underlying inflation given that inflation expectations remain unanchored. Indeed, 5y5y inflation swaps have increased to 1.75%, implying that markets see improved odd of the ECB reaching its inflation target but still higher odds of inflation remaining below target 5 years from now than above target.”