Euro area core inflation should fall to a 2-year low

Emily Nicol

Key focuses in the euro area include flash inflation estimates, bank lending figures and the Commission’s sentiment indicators
All eyes in the euro area this week will be on the flash estimates of inflation for February on Friday. While the disinflationary trend has proved somewhat sticky of late, due primarily to the withdrawal of government energy support and other tax changes at the start of the year, we expect headline inflation to take a further step down this month, by 0.3ppt to 2.5%Y/Y. This would however remain 0.1ppt above November’s 28-month low, albeit largely due to the impact of higher energy prices. Given the decline in factory pipeline pressures and subdued domestic demand, non-energy industrial goods inflation is expected to fall to its softest rate since mid-2021. And while it will remain historically elevated, we also expect services inflation to moderate to a 20-month low of 3.6%Y/Y. As a result, we forecast core inflation to drop around ½ppt to 2.8%Y/Y, which would be the lowest since February 2022. Ahead of the aggregate release, inflation numbers from Germany, France, Spain, Portugal and Ireland (published on Thursday) and Belgium (Wednesday) will offer further insight.

Survey-wise, the European Commission’s economic sentiment indicators for February – arguably the best guide to euro area GDP growth – are due on Wednesday. The preliminary consumer confidence figure suggested that sentiment among euro area households remains muted, although the headline confidence index partly reversed the decline recorded in January, rising 0.6pt to -15.5, the second-highest reading since before Russia’s invasion of Ukraine. In terms of the survey’s business components, like yesterday’s flash PMIs, we would expect to see a further improvement in services confidence this month, while equivalent measures for the manufacturing and construction sectors will remain constrained by lacklustre demand and high borrowing costs. Overall, the headline Economic Sentiment Index is forecast to rise to its highest level since June, albeit still some way below the long-run average. Other data to be published this week include euro area bank lending figures for January (tomorrow), which will further illustrate the dampening impact of high borrowing costs on loan demand at the start of the year. Meanwhile, despite subdued economic recovery momentum, the latest euro area jobless figures (Friday) are expected to see the unemployment rate move sideways at a series low of 6.4% in January, implying a still very tight labour market. German labour market figures for February and retail sales data for January are also due Thursday.

February manufacturing ISM and January personal income, spending and PCE deflators due from the US
It will also be a busy week for top-tier US economic releases, which will provide an update on recovery momentum since the start of the year. Sentiment indices include the release tomorrow of the Conference Board consumer survey, followed on Friday by the manufacturing ISM. While the output component in January remained consistent with only modest expansion (50.4), the new orders index jumped to 52.5, the highest since May 2022, suggesting further improvement ahead. Advance figures for January durable goods orders (tomorrow) are expected to report a marked decline at the start of the year – Daiwa America is forecasting a drop of around 5%M/M – due to a fall in the aircraft sub-sector, with Boeing having received the weakest monthly orders since October 2020. Excluding transportation, durable goods orders are expected to have moved broadly sideways in January. Meanwhile, advance goods trade figures, will be released alongside updated Q4 GDP data on Wednesday, with the latter expected to broadly align with the previous reading that reported surprisingly solid growth of 3.3%Q/Q annualised. Likely of most interest on Thursday will be the January figures for personal income and spending, as well as the associated deflators that are closely watched by Fed officials. While income is forecast to have risen a further 0.4%M/M, growth in spending is expected to be softer than the rise of 0.7%M/M in December. Meanwhile, consistent with the jump in consumer and producer prices that month, the core PCE deflator is expected to rise 0.4%M/M – which would be the strongest monthly increase since last February. Various housing market figures include new home sales (today), FHFA and Case-Shiller home price indices (tomorrow), and pending home sales (Thursday).

Japanese inflation, industrial production and retail sales figures due in the week ahead
In a busy week for top-tier Japanese data, arguably the most noteworthy release will be tomorrow’s inflation numbers for January. These are expected to show that the headline CPI rate fell 0.7ppt to 1.9%Y/Y, the first sub-2% reading since March 2022. The BoJ’s core CPI measure, excluding fresh foods, is similarly expected to slip back below the 2% target, down 0.4ppt to 1.9%Y/Y. When also excluding energy, the BoJ’s preferred inflation measure is forecast to have eased 0.4ppt on the month, albeit remaining comfortably above the target at 3.4%Y/Y. In terms of activity, January industrial production figures (Thursday) are expected to report a sharp decline at the start of the year – circa 7%M/M – due in part to a temporary production halt by Daihatsu over a safety scandal. Meanwhile, retail sales figures (due the same day) are forecast to have only partially reversed the decline in December, amid subdued consumer confidence, for which the latest survey is due Friday. That day will also bring January unemployment figures, which are expected to show the jobless rate moved sideways at 2.4%, the joint-lowest since March 2020.

UK bank lending figures and BRC shop price inflation due this week
The UK’s economic data calendar this week kicks off with the CBI’s latest distributive trades survey (today), which will give a first insight into retail conditions in February. The release of the BRC shop price survey for February (tomorrow) might well report a further moderation in the headline inflation rate as retailers continue to pass on lower input costs in the face of weak demand. Meanwhile, despite the recent improvement in mortgage deals and signs of a turnaround in the housing market, the BoE’s bank lending numbers (Thursday) will likely report that mortgage lending remained subdued in January, while the net increase in consumer credit is expected to remain in line with the average of the past five months (£1.6bn), roughly double the average in the decade before the pandemic. At the same time, the Nationwide house price index for February, is expected to report a fourth monthly rise out of the past five, to leave the annual rate in modestly positive territory for the first time January 2023.

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