Euro Area annual inflation was -0.2 % in February 2016, down from 0.3 % in January 2016. Looking at the main components of euro area inflation, services have the highest annual rate in February (1.0 %, compared with 1.2 % in January), followed by food, alcohol & tobacco (0.7 %, compared with 1.0 % in January), non-energy industrial goods (0.3 %, compared with 0.7 % in January). All the figures are positive apart from energy, that dragged down drastically the overall inflation for February (-8.0 %, compared with -5.4 % in January).

Each of the main components contributes in varying degrees to the headline inflation in the euro area. In terms of weight, services is the largest component, accounting for around 44.2 % of individual consumption expenditure in the euro area. It is followed by non-energy industrial goods with around 26.6 %. Food, alcohol & tobacco and energy account for around 19.5 % and 9.7 %, respectively. Together, they comprise less than one third of euro area expenditure, but they have significant impacts on the headline inflation as their levels tend to fluctuate significantly more than the other components.


If the situation regarding inflation is not positive in Europe, it is even worse for what concerns Japan. In fact Japanese inflation is not dragged down just by energy (-6.7 % YoY), but it also shows negative figures in housing (-0.1 %) and goods (-0.4 %). In January, the core consumer price index, which excludes volatile fresh food prices, fell 0.7% compared to the previous month, which was below the 0.2% drop in December. The print, which hit an 86-month low, mainly reflected a sharp drop in prices for clothes and footwear as well as for transportation and communication. Core prices in January were flat over the same month last year and overall inflation in January fell from 0.2% in December to zero. Core prices for Tokyo, that are available one month in advance of the national figures and thus a leading indicator for countrywide inflation, fell 0.1% in February over the same month of the previous year, which was less than the 0.2% drop that market analysts’ had expected.

Moving our focus to US, the annual inflation rate surged to 1.4%, with a flat figure in in January. This data would have been higher excluding from the calculation cheaper food and gasoline. In fact housing prices and medical care bills would have boosted the YoY figures. Gasoline prices declined 4.8% in January, replicating the December figure. If we enlarge our view to all the energy-related companies the index suffered a -2.8%. The inflation in food-related items registered a flat figure in January compared to a -0.1% in December 2015. The energy inflation decline follows the drastic fall in oil prices. From this stand point it will be interesting to analyze the next month data that will take into account the partial recovery of mid-February and March. The new trading levels of oil prices could reverse this trend on a monthly basis. On the other hand new vehicles prices surged 0.3% in January, apparel and medical care registered respectively a 0.6% and 0.4% increase. Furthermore some figures would have been slightly higher if we deduct the impact of energy prices on the services. Medical care for instance would have seen a 3.3% YoY increase instead of a lower 2.1.

Considering the inflation with all the items included but without energy and food the January figure for inflation would have been +0.3% reflecting an annualized figure of 2.2%, in line with the FED goals.

Focusing on each component therefore, we can see how the situation is rather different around those three countries. In the Eurozone, the fear of a deflationary pressure on the economy seems excessive. In fact, all the main components, apart from energy, are positive and the negative effect on inflation brought by the current energy levels could be reversed by a progressive stabilization of oil prices.

In Japan the situation is much more serious, and deflation fears are justified by a negative figure regarding housing and goods. Expecting people lower prices in the future, i.e. negative inflation, and being utility higher when prices are lower for every consumer (no matter their maximum willingness to pay), consumers postpone their purchase thus making negative inflation a self fulfilling prophecy on the back of lower demand.

This doesn’t apply for the Eurozone instead, but nonetheless deflationary fears are priced in markets. That is why, we think that for what concerns Europe there will be a gradual reduction in the spread of peripherals government bonds on the basis of an over depreciation of their value that is not fully consistent with the current levels of each single component of the European CPI.

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