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Friday November 28, 2008 - 13:54:56 GMT
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Forex Trading: The EUROZONE flash CPI falls sharply. More declines to come

The Flash YoY CPI estimate for the month of November was released this morning at 2.1%.  This is congruent with around a 0.5% decline in the MoM measure for the CPI for the month and down sharply from 3.2% last month.  The official CPI will not be release for another few weeks.  However, the flash tracks the actual release very closely.  

The reason for the sharp decline this month is simply in the numbers.  On a rough basis, the YoY should equal the sum of the MoM (in reality it is a little higher when the numbers are reported but overall, the mathematics work closely).  Last November 2007 the CPI rose by 0.5% (See the Month on Month numbers below). This month we already know the German CPI fell by 0.5%.  As a result, if Eurozone inflation falls by a similar amount, the +0.5 gain from November  2007 will be replaced by -0.5% this month.  The YoY therefore falls by at least 1.0% for the month.  The 3.2% decline to 2.1% in the flash indicates the potential for a 0.6% decline in Eurozone inflation in November.

 Date CPI MoM 
 Nov 07  0.5%
 Dec 07  0.4%
 Jan 08  -0.4%
 Feb 08  0.3%
 Mar 08  1.0%
 Apr 08  0.3%
 May 08  0.6%
 Jun 08  0.4%
 Jul 08  -0.2%
 Aug 08  -0.1%
 Sep 08  0.2%
 Oct 08  0.0%
 Nov 08  -0.5%e

Looking ahead, Dec 2007 prices rose by 0.4%.  If inflation next month remains low and indications are the consumer prices will continue to remain weak as global growth slows, the YoY inflation is likely to fall below the bottom of the ECB target range of 2% - next month.   In January, prices typically are down as post Christmas Sales kick in.  So although prices in January 2008 MoM inflation fell by 0.4%, they are likely to fall in January 2009 as well.  Gains in future months indicate the potential for sharply lower YoY inflation as well.  Feb 2008 +0.3%, March +1.0%, April +0.3% and May +0.6% will likely not show the gains  of that maginitude in 2009.  As a result, the YoY inflation rate should decline consistently.

How does this expectation translate into projected YoY inflation rates?  If inflation rates going forward average +0.2% with the expeption of -0.2% in January when post Christmas sales kick in, the YoY inflaiton rate would decline to 0.7% by May 2008.  The chart below shows the projected progression given this simplified assumption. 

Of course, projecting future consumer prices is hard to predict and it is of course influenced greatly by the price of oil and commodities remaining low, and global growth not picking up (remember monetary and fiscal policy will attempt to spur on growth). However currently, the concensus is for growth to remain muted, unemployment to rise (Eurozone Unemployment rose this morning to 7.7%) and this in turn should keep consumer prices low. 

 

As a result, the ECBs concerns about inflation could be replaced with worries about deflation, if measures for growth do not work.  They should, therefore, continue to cut rates into 2009 and through 2009.  This is turn, should keep pressure on the EURUSD in the medium to long term as rates catch up to the already reduced US rates. 

 

 

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