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Concerns over possible deflation in the Eurozone grow with latest CPI numbers - ING

FXStreet (Łódź) - Martin van Vliet from ING comments on the final Eurozone CPI estimate for September, released today and showing a drop to 0.3% from 0.4% in August, year-on-year.

Key quotes

"The decline was partly driven by a drop in energy price inflation (from –2.0% to -2.3%), but core inflation also eased, from 0.9% to 0.8% (slightly better than the “flash” reading of 0.7%)."

"The decline in headline inflation would have been steeper had it not been for the bounce in the food, alcohol and tobacco component (from -0.3% to +0.3% YoY)."

"Until recently the consensus view was that headline inflation in the Eurozone would gradually start to pick up again from Q4 onwards. But now that oil prices have tanked, headline inflation may stay close to zero for longer and not reach 1% before Q4 of next year (if at all)."

"Financial markets also seem increasingly concerned that Eurozone inflation could get stuck below the ECB’s 2% target ceiling. Indeed, the ECB’s favourite gauge of inflation expectations, the five-year, five-year forward inflation-swap rate is currently trading at a record low of 1.72%, which will not be received with much enthusiasm at the ECB."

"All in all, with the cushion against deflation getting smaller and smaller and economic growth in the Eurozone stagnating, pressure on the ECB to extend its purchase programmes by adding government bonds may become overwhelming over the next few months."

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