As expected, the flash CPI inflation increased a tad to 0.4% in October, up from 0.3% in September. This happened despite the drop in energy prices and even after German flash CPI inflation yesterday turned out lower than expected in October. On the other hand, it is still too early to cancel out the fear of deflation since core inflation simultaneously took another dive down to a record low of 0.7% in October, as we expected. This said, we expect a more stable development in inflation in the coming months as a weaker EUR takes effect (see graph). Today we also got an unchanged unemployment rate of 11.5% in September, underlining that the falling trend over the past year is already beginning to stall, probably reflecting the modest and weakening growth. However, the number of unemployed dropped to reach a two-year low.
Following increase in sentiment surveys
The higher headline inflation will help to reduce the pressure on the ECB to provide further stimulus at the monetary policy meeting next week. In this context, it should also be added that inflation expectations in financial markets and among consumers have stabilised a bit lately, although they are still low. Add to this that we earlier this week received an unexpected increase in the European Commission’s business confidence barometer ESI, thus following a similar trend in the PMI last week.
ECB not closer to further stimulus
We do not expect the ECB and Draghi to approach additional stimulus at the monetary policy meeting. There has been pending speculation about whether the ECB is considering broadening its newly launched purchase programmes to also include corporate bonds and later probably also government bonds. This speculation has been supported by existing programmes that seem to have had a slow start. We furthermore expect that the ECB at the monetary policy meeting will express some optimism on what so far appears to have been a successful conduct of its “Comprehensive Assessment”. Combined with some emerging signs of recovering in private credit growth, the ECB will probably express confidence in the support from lending to the real economy.
