September’s data revealed a sharp rise in euro-zone HICP inflation from 2.5% to 3.0%, which appears to have been driven by a renewed rise in core price pressures as well as energy inflation. With consumers’ inflation expectations remaining high in September and wage growth rising in Q2, underlying price pressures might appear to be mounting. However, as the business surveys now suggest that the region is back in recession, growing economic spare capacity should prompt core inflation to fall back very soon. Accordingly, we agree with the market view that the ECB will cut interest rates before year-end
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