Blog Post

The inflation basket case

Inflation in the euro area has finally reached 2%. But Draghi is right to warn that the underlying dynamics do not point to this being a self-sustaining trend. Breaking down the numbers shows that many inflation basket items are still showing weak price growth or even deflation.

By: and Date: March 17, 2017 Topic: Macroeconomic policy

Last week, the European Central Bank left interest rates and its quantitative easing programme unchanged. The decision came as February’s inflation for the euro area reached 2% for the first time since 2013, with German inflation slightly above that level.

ECB President Draghi highlighted that there are no signs yet of a convincing upward trend in underlying inflation. Indeed, this stands out clearly if we look more in detail at the composition of the basket. Figure 1 shows the headline and core inflation rates for the euro area, together with the share of items in the Harmonised Consumer Price Index (CPI) basket that have experienced inflation rates below 1 and below zero. While the headline inflation rate for the EA has increased from 0.6% in November 2016 to 1.8% in January 2017 and 2% in February, the percentage of items that are in deflation has remained relatively high. As of February 2017, 21.3% of the EA HCPI basket was in deflation (up from 20.2% in January) and 47% of items experienced price growth below 1%.

Source: Bruegel based on Eurostat

Figure 1

As always, the situation differs markedly at the individual country level. Three countries – Greece, Ireland and Cyprus – have more than 40% of their HICP basket in deflation, while eight more countries have had negative inflation on more than 25% of the basket. Germany, Belgium and Austria are the only countries where less than 20% of the HICP basket is in deflation (Figure 2, see also Table 1 at the end).

The increase in the headline inflation appears to be mostly driven by a surge in energy and vegetable prices. At the EA level, the rate of inflation for liquid fuels turned from -5.4% in November 2016 to +30% in January 2017, i.e. an increase of 35.6 percentage points. To the extent that market-based inflation expectations have a tendency to react strongly to changes in oil prices, the assessment in this moment should be cautious.

At the same time, inflation for vegetables went from -0.7% to +16.2% over the same period. In Germany between November 2016 and February 2017 liquid fuel price inflation increased by 32.2 percentage points and vegetable price inflation increased by as much as 23 percentage points. The latter phenomenon seems to be related to a supply shortage, due to the bad weather conditions in Italy and Spain.

As a result of these two developments, headline HICP inflation spiked during the last three months, while the core inflation rate – which excludes fuels and unprocessed food – remained flat at around 1%.

Importantly, the share of the HICP basket in deflation is not decreasing equally across countries. Table 1 shows that some countries – such as Spain, Slovenia and to some extent Germany – saw a dramatic reduction in the share of their HICP basket that is in deflation since the beginning of QE in 2015. In other countries, however, the improvement has been slow. In France, 29% of the HICP basket recorded negative inflation in February 2017, as opposed to 33% in January 2015. So the decrease has been much less pronounced. In Malta, the percentage of the basket in deflation has actually increased.

Overall, these indicators point to the fact that it may indeed be too early to speak of a “sustained upward trend” in inflation in the euro area.

Table 1 – Country-level data on HICP inflation and % of basket in low inflation or deflation

Table 1


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read about event More on this topic
 

Past Event

Past Event

What is in store for Euro area economies?

ECB Executive Board Member Philip Lane discusses the outlook for Euro area economies.

Speakers: Maria Demertzis and Philip Lane Topic: European governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 5, 2022
Read about event More on this topic
 

Past Event

Past Event

Tackling future risks to banks

How to address vulnerabilities in banks in the coming years?

Speakers: Maria Demertzis and Elizabeth McCaul Topic: Banking and capital markets Date: March 29, 2022
Read article More on this topic More by this author
 

Opinion

The week inflation became entrenched

The events that have unfolded since 24 February have solved one dispute: inflation is no longer temporary.

By: Maria Demertzis Topic: Macroeconomic policy Date: March 8, 2022
Read article More on this topic More by this author
 

Opinion

The weakness of average inflation targeting

Introducing average over time without defining what this means is counterproductive and current levels of inflation in the US will sooner or later expose this weakness in the Fed’s new strategy.

By: Maria Demertzis Topic: Macroeconomic policy Date: February 22, 2022
Read article Download PDF More on this topic More by this author
 

External Publication

Book notes: Monetary policy in times of crisis

Review of 'Monetary policy in times of crisis: a tale of two decades of the European Central Bank' published in the Central Banking.

By: Francesco Papadia Topic: Macroeconomic policy Date: February 17, 2022
Read about event More on this topic
 

Past Event

Past Event

A debate on fiscal rules and the new monetary strategy

Presentation of the Yearbook of the Euro 2022.

Speakers: Maria Demertzis, Fernando Fernández, Gonzalo García Andrés, José Carlos García de Quevedo, Pablo Hernández de Cos and Jorge Yzaguirre Topic: European governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: February 17, 2022
Read article More on this topic More by this author
 

Opinion

Non-fungible tokens (NFTs): the next chapter in crypto

As with any new technology, exciting opportunities are being created, but similarly there are risks.

By: Maria Demertzis Topic: Digital economy and innovation Date: January 25, 2022
Read article More by this author
 

Podcast

Podcast

Last but not the least

An overview of economic policy and beyond in 2021.

By: The Sound of Economics Topic: European governance, Global economy and trade Date: December 22, 2021
Read article
 

Blog Post

European governanceInclusive growth

12 Charts for 21

A selection of charts from Bruegel’s weekly newsletter, analysis of the year and what it meant for the economy in Europe and the world.

By: Hèctor Badenes, Henry Naylor, Giuseppe Porcaro and Yuyun Zhan Topic: Banking and capital markets, Digital economy and innovation, European governance, Global economy and trade, Green economy, Inclusive growth, Macroeconomic policy Date: December 21, 2021
Read article
 

Blog Post

European governance

Including home-ownership costs in the inflation indicator is not just a technical issue

The European Central Bank is right to propose inclusion of owner-occupied housing services in the inflation indicator. But the ECB’s preferred method would involve an asset price in the consumer inflation indicator.

By: Zsolt Darvas and Catarina Martins Topic: European governance, Macroeconomic policy Date: November 18, 2021
Read article Download PDF More by this author
 

Parliamentary Testimony

European governanceEuropean Parliament

The New Euro Area Inflation Indicator and Target: The Right Reset?

Testimony to the Monetary Dialogue Preparatory Meeting of the European Parliament's Committee on Economic and Monetary Affairs (ECON).

By: Zsolt Darvas Topic: European governance, European Parliament, Macroeconomic policy Date: November 9, 2021
Read article
 

External Publication

European governanceEuropean Parliament

The new euro area inflation indicator and target: the right reset?

In-depth analysis on the European Central Bank's revised inflation target prepared for the European Parliament's Committee on Economic and Monetary Affairs (ECON).

By: Zsolt Darvas and Catarina Martins Topic: European governance, European Parliament, Macroeconomic policy Date: November 4, 2021
Load more posts