Inflation rate in the euro area falls to 1.6 per cent – lower oil price makes itself felt

Last year the euro area’s Harmonized Index of Consumer Prices (HICP) was once again in thrall to energy prices. The crude oil price for Europe’s benchmark Brent blend rose steeply last year, peaking at over USD 85 and raising the consumer price inflation rate in the second half of 2018 to and beyond the two-per-cent mark for several months. But since October crude oil prices have come down appreciably. Recently, the price has even fallen significantly below USD 60. This has now also made itself felt with something of a time lag for consumers buying gasoline and heating oil. The temporary buoyancy in food, alcohol and tobacco prices has now also waned.

So, on the bottom line the inflation rate came down significantly at the end of the year. The quick estimate for December was a year-on-year inflation rate of 1.6 per cent. In November the inflation rate was still at 1.9 per cent.

At the country level, too, price inflation was less dynamic in those economies that have also already released the first estimates for the price trend. In Germany the Harmonised Index of Consumer Prices (HICP) came back down from 2.2 to 1.7 per cent, in France it fell from 2.2 to 1.9 per cent. Italian consumer prices increased by only 1.2 per cent after 1.6 per cent in the previous month and in Spain inflation slowed from 1.7 to 1.2 per cent. Price inflation in the energy sector weakened uniformly in all countries.

The euro area’s annual average inflation rate in 2018 was 1.7 per cent, which was 0.2 percentage points higher than in 2017. In 2019 the price trend is likely to show roughly the same dynamic. Admittedly, especially in the first few months of the still young year the inflationary effects of energy prices will wane, but on the other hand the underlying domestic inflationary pressures will probably gradually make themselves increasingly felt. After more than five years of economic recovery and a steady decline in unemployment, increasing wage pressure is likely to gradually exert upside pressure on prices.

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