ECB hawks restate case for 75bps hike next month

Emily Nicol
Chris Scicluna

ECB hawks restate case for 75bps hike next month, but September inflation data from Germany and Spain give mixed impression
While later today ECB Chief Economist Lane will speak about the drivers and dynamics of inflation, and might reiterate his view that there remains little evidence so far of lasting second-round effects, a pair of the Governing Council’s hawks, Muller and Simkus, this morning continued to argue for their preference of a 75bps hike at the ECB’s October policy meeting. Tomorrow’s flash euro area inflation estimates might have a key bearing on the sense of urgency within the Council for further front-loading of policy normalisation next month. But this morning’s flash estimates from Germany and Spain gave a somewhat confused message on what to expect from tomorrow’s figures.

German inflation on track for new high today as summer discounting measures expire
In particular, in Germany, as had been expected due to the expiration of the discounted travel pass and fuel duty cut at the end of August, the early indications from the Länder suggest a notable increase in consumer prices this month. In Germany’s largest state, North Rhine-Westphalia, which accounts for a little more than 20% of GDP, prices jumped at the second-fastest pace on the series (1.8%M/M) to leave the annual inflation rate in double-digits for the first time, up 2ppts to 10.1%Y/Y. The detail showed a surge in transportation prices, up 9.6%M/M to leave the annual rate up 10.1ppts to 12.7%Y/Y. Clothing inflation also roughly doubled to 2.9%Y/Y, and food inflation was up a further 1.9ppts to a staggering 18.9%Y/Y, while hospitality prices continued to trend high, up 0.5ppt to 8.5%Y/Y. So, despite a very modest easing in durable goods inflation, down 0.1ppt to 7.7%Y/Y and slightly lower leisure costs, down 0.5ppt to 6.0%Y/Y, core inflation likely rose to a new high in September too. Overall, Germany’s national and EU-harmonised measures of inflation are expected to rise around 1½ppt to 9.5%Y/Y and 10.2%Y/Y respectively.

Spanish inflation declines more than expected on lower electricity, fuel and transport costs
In contrast, however, Spanish inflation fell well short of expectations in September. On the national CPI measure, prices fell 0.6%M/M to leave the headline inflation rate down a larger-than-expected 1.5ppts to 9.0%Y/Y, a four-month low. And the EU-harmonised HICP measure fell 1.2ppts to 9.3%Y/Y. Spain’s statistical office (INE) attributed the easing largely to the decrease in electricity prices, as well as lower fuel prices and a decline in transportation prices linked to government support initiatives. As such, the national core CPI estimate eased 0.2ppt to 6.2%Y/Y.

Commission survey to signal slowing economic momentum at the end of the summer
Today will also bring the European Commission’s comprehensive business and consumer surveys, which we expect to echo the deterioration in the flash PMIs and various national sentiment indicators and confirm the record low in consumer confidence – the flash index fell 3.9pts to a new series low of -28.8. With the PMIs suggesting that the initial post-pandemic rebound in demand for services has faded, while manufacturers struggle with supply challenges and weaker demand, the business sentiment indices seem likely to have fallen sharply in September too. As such, the headline economic sentiment index is expected to fall to a near two-year low. But with the PMIs having also indicated a pickup in price pressures this month, the indicators of price expectations will also be closely watched.

As focus remains on UK policymakers, car production up in August, but still well down on pre-pandemic levels
The focus in the UK today will remain firmly on the financial markets and policymakers. At lunchtime today we are scheduled to hear from BoE Deputy Governor Ramsden, who is due to take part in a panel discussion on central banking. Chief Economist Pill will also speak this evening, while external MPC member Tenreyro will speak on a panel discussion on inflation.

In terms of economic data, according to SMMT, UK car production rose for the fourth consecutive month in August, with output rising 34%Y/Y to 49.9k units. But SMMT noted that the recent improved performance failed to offset the persistent weakness amid global supply shortages – indeed, output in August was still roughly 46% below the equivalent pre-pandemic level in August 2019. And in the year to date, output (511k) was still almost half a million units below the equivalent average volume in the three years before the pandemic, and more than 600k lower than the year-to-date average in 2016.

US Q2 GDP likely to be unrevised at -0.6%Q/Q ann., but back revisions to be also watched
A relatively quiet day for US economic releases, with the final estimate of Q2 GDP. Additional data published over the past month suggest that growth will likely be unrevised at -0.6%Q/Q annualised. Benchmark revisions to data from 2017 through to Q122 will also be published, with revisions to Q1 to be watched closely, as GDP data has up to now showed a contraction in the economy (-1.6%, annual rate) but an alternate measure of output, Gross Domestic Income (GDI), showed growth of 1.8%.

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