Oil price and pandemic put pressure on inflation in the EMU – but the information is currently limited

Inflation in the euro zone weakened again significantly in May due to the fall in oil prices, but also because of the Corona crisis. At the country level, too, consumer price development was unable to escape the downward pressure. The Harmonised Index of Consumer Prices (HICP) in the Monetary Union fell from 0.3 to 0.1 percent, thus approaching zero.

The price of energy in the consumer basket fell significantly. This is hardly surprising given the significantly lower oil price compared to the previous year. But the price pressure on other goods also eased. This reflects the weakened demand caused by the lockdown measures, which leaves suppliers little scope for price increases.

However, question marks remain regarding the validity of the price data. For one thing, many areas were practically completely shut down by the lockdown. The measurement of consumer prices in these areas has been subject to a high degree of uncertainty since March. In France, for example, around 45% of the relevant data was still not collected in May and could only be extrapolated under certain assumptions. In Germany, on the other hand, the proportion was only 12 percent and 22 percent in the EMU as a whole. This will improve somewhat in the coming months.

On the other hand, however, the uncertainty and restrictions among consumers have probably also led to changes in consumer behaviour which the statistically determined basket of goods cannot (yet) capture. This increases the danger of false price signals.

All in all, the inflation rate is thus continuing to fall, but we do not see any danger of a deflationary trend. Nevertheless, this question will certainly occupy market observers a great deal in the coming months. However, the inflation rate can only help to a limited extent in answering it at present due to its limited informative value.

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