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Eurozone disinflation accelerates as markets price in rate cut

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By Craig Erlam  

Eurozone inflation fell further than expected in October, leaving the headline HICP rate within touching distance of the ECB’s 2% target.

While policymakers have continued to push back against talk of rate cuts, the questions will be impossible to ignore now with markets pricing in one in April and at least four in total next year.

Core inflation remains higher than the headline rate at 3.6%, but the pace of deceleration is extremely promising. While policymakers expect inflation to rise slightly over the coming months due to less favourable base effects, they also expected it to fall slower, so there’s every chance price growth could continue to edge lower.

One thing that’s been consistent during this inflation crisis is its unpredictability and perhaps we’re seeing this on the way down too. It was initially transitory, then required some rate hikes and before you knew it, it was accelerating at a much more aggressive pace than anyone expected. Now it’s falling faster than policymakers assumed too.

And with the eurozone economy on the brink of recession, policymakers will have to question whether conditions are too tight based on recent evidence, almost certainly starting at the meeting in two weeks.

So far, we’ve been told that it’s not the time to even have the conversation, but surely that’s no longer true. The December meeting has just become much bigger and forecasts will be crucial.

US inflation continues to fall

US inflation is also heading in the right direction, although the bulk of the PCE readings were in line with expectations.

Still, the monthly headline figure at 0% was another step in the right direction and below market expectations, which again suggests disinflationary pressures are stronger than central banks have been willing to accept.

Policymakers at the Fed must already be considering withdrawing such a hawkish rhetoric after the meeting in two weeks and it will be interesting to see whether the jobs and CPI inflation reports in the interim tip them one way or the other.

Consensus among OPEC+?

Oil continued to creep higher, but price action has been a little volatile amid all of the rumours around the virtual meeting.

The most recent headlines suggest a consensus has been reached, but what that number is still isn’t clear. Between 1.3 and 2 million is what’s been speculated, but the alliance has surprised before and may do so again. ​ ​

 

Craig Erlam is Senior Market Analyst, UK & EMEA at OANDA

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