Inflation weakens in Europe

Thursday 24th September 2015 06:49 EDT

The main headline this week was the news that Alexis Tsipras is set to return to power in Greece following another emphatic election victory, securing a new mandate after he yielded to the demands of European leaders for more austerity in the crisis-hit country. The former prime minister’s Coalition of the Radical Left, or Syriza, received 35.5% of the vote. With Syriza set to fall short of a majority in the 300-seat parliament, Tsipras will enter negotiations to build a viable government with the same coalition partner as before. 
In other news in Europe Inflation across the Eurozone unexpectedly weakened last month; the figures raised analysts’ expectations that the ECB will expand its quantitative easing policy by the end of the year. The annual rate of inflation fell to 0.1% in August from 0.2% in July. This marks a downward revision to Eurostat’s flash estimate of 0.2% and pushes annual inflation further away from the ECB’s target of just below 2%. Eurozone industrial production beat economists' expectations in July, rising to a five-month high, amid a higher volume of energy, capital and durable consumer goods. Industrial output rose 0.6% compared to June, and 1.9% year-on-year. Economists polled by Reuters had been expecting a 0.3% monthly rise. The production of energy increased 3%, as capital goods rose 1.4% and durable consumer goods 1.3%. The figures suggest the European Central Bank's (ECB) unprecedented bond buying programme, pumping €60bn (£46.7bn) into the euro area every month until September 2016, is starting to boost the region's economy. 
Retail sales in the U.S. climbed for a second straight month, a sign that consumers may not be too concerned about recent volatility in financial markets, especially in China. The 0.2 percent increase in August followed a 0.7 percent gain in July that was larger than previously reported. Although confidence has taken a hit from stock-market turmoil and global-growth concerns, the data shows that households are still putting their savings from cheap energy to work. More jobs and higher pay would go a long way in supporting household spending, which Federal Reserve policy makers are watching as they consider raising interest rates. Despite holding rates steady, the central bank has forecast that a hike is coming before the year is out, after almost seven years near zero. Since the bank is meeting only twice more this year, this means an increase would come in either October or December.  
U.K. inflation returned to zero in August, down from July’s rate of 0.1%.Consumer prices were unchanged compared with a year earlier following a 0.1 percent annual gain in July. The figure was in line with the median forecast of economists. Inflation excluding volatile food and energy costs slowed to 1 percent from 1.2 percent, also as predicted. Cheaper motor fuels, in particular diesel, had the biggest downward effect on inflation with prices falling 3 percent compared with a 1.5 percent decline a year earlier. There was also pressure from clothing and footwear prices, which rose less last month than they did a year earlier. Inflation has held below 2 percent target since the start of 2014, and it’s been close to zero for much of this year. That’s boosting consumer spending power, with data on Wednesday predicted to show underlying wage growth accelerating to 2.9 percent in the three months through July, the fastest in more than six years.
The figures may increase expectations that the Bank of England is still months away from raising its benchmark rate from 0.5 percent. While a tightening labour market is putting upward pressure on wages, cheaper oil and food are keeping inflation well below the BOE’s 2 percent target. Governor Mark Carney says the decision on when to end more than six years of record-low borrowing costs will come into sharper focus around the turn of the year. The number of people claiming unemployment benefits in the U.K. unexpectedly raised throughout August and salary growth increased. We saw the claimant count rise by 1,200 last month compared to expectations for a decline of 5,000. Average earnings (including bonuses) rose by 2.9% in the three months to July from a year earlier after a 2.6% increase in the same month. Beating the 2.5% forecast. Average earnings (excluding bonuses) also increased by 2.9%. In Mark Carney’s speech he stated that ‘the timing of a rate rise would be in sharper focus at the turn of the year.’ The outlook for China’s economy has been a recent worry. He said there was “downside risk” but not enough to adjust the Bank’s forecasts at the moment.

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