April 01, 2015


The melting core

As is so often the case, we interpret the official inflation data differently from the mainstream press. For us, yesterday's Eurostat flash data for March reflected a deterioration. Core inflation was down again, back to 0.6% after briefly rising to 0.7% last month. This is the lowest number reached during the present cycle, and has been well off the target for over two years now. This is the number we would consider as the right one to target for the ECB to get close to 2% in the medium term, or indeed any term. As we explained yesterday, the latest German wage deals are consistent with a permanently lower level of core inflation, not with 2%.

Headline HICP inflation was up, but still negative at -0.1% yoy, recovering from a trough of -0.6% in January at the height of the oil price fall. These rates bounce around quite a bit because of the high volatility of oil prices this year in the presence of overlapping geopolitical events. Such highly volatile movements carry little information. 

Unemployment in the Eurozone is again slightly down, at 11.3% in February from 11.4% in January and 11.8% from the year before. The fall in the average masks wide differences. German unemployment dropped to 4.7% in February from 4.8% the month before, with similar falls in Austria, Poland, Ireland and the Netherlands. Unemployment in France stagnated at 10.6%, which is still 0.1pp above the November statistic, while it rose slightly in Italy – up to 12.7% – as well as in Finland and Portugal. And while it is also falling in Spain, from 25.2% to 23.2% between Feb 2014 and Feb 2015, the sheer level suggests that this remains an economy in deep trouble. At that rate of recovery, unemployment would only come back to pre-crisis levels by end-2022, with youth unemployment still above 50%.

There are quite a number of reports out now, showing an improvement in cyclical indicators, for example this one from Istat, which reflect the initial stages of a recovery driven by falling oil price and a 10% real effective depreciation of the euro. There is no doubt in our mind that a significant cyclical recovery is under way right now. The test will be whether this recovery can elevate itself beyond the statistical year-on-year effects. 

Our other stories

Today we also have stories on where the Greek negotiations are still going wrong; Finland in breach of EU law; a resignation high up in the CSU; whether the eurosystem is a glorified currency board; how ESM creditors might be protected at the expense of anybody else; what caused DuessHyp to collapse; a move on proprietary trading; the ECB’s ABS successes; and strategies for Podemos.

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