The Euro Area unveils its inflation numbers on Tuesday. This singular event has the potential to make a huge impact on the European Central Bank’s (ECB) forthcoming monetary policy decisions. Analysts think this data could give the ECB the confidence to end its series of interest rate cuts. They view it as important for making the case for a shift in policy.
In August, Euro Area inflation based on the Harmonized Index of Consumer Prices held flat at 2.3%, in line with preliminary figures. This figure is just above the 2.2% of the imputed rent, the estimated core measure of inflation. Core inflation rose to 2.1% in August. That’s up from the last core rate of 2.0%, and it doesn’t include the more volatile categories such as food and energy.
Still, analysts say these figures may further strengthen the ECB’s argument for a shift in its long-held monetary policy. A constant overall inflation rate alongside an increase in core inflation would indicate that the economy is starting to strengthen. This might reduce the need for additional reductions. What experts are cautioning against is that the data so far fails to account for the latest fiscal stimulus enacted in Germany. They hope these steps will indeed postpone their inflationary effect till at least 2026.
These expected inflation numbers arrive as the Eurozone is facing a very delicate economic balance. Policymakers are right to be concerned about inflation. This time, they’ll quickly start witnessing the benefits they’ve been hoping for from the recently negotiated US-EU trade deal wash over into the real economy. This latest development should more than fortify the ECB’s judgment that economic conditions are likely evolving as it considers what’s next.