Today at 10.00 UK Time, the European statistics office Eurostat will release Producer Price Index (PPI) figures for May. Christophe Barraud, recognized as one of the “Top Forecaster” by Bloomberg, suggests it could surprise downward, contracting for a fifth straight month. On a YoY basis, PPI should turn negative for the first time since Dec. 2020.
On a YoY basis, PPI already decelerated sharply from +43.4% in August 2022 to +1.0% in April 2023. This sharp slowdown mainly reflects a drop in energy costs (-8.9% in April). This trend is likely to gain traction in the coming months as oil and power prices kept normalizing while base effects remain negative.
According to Barraud, regional data already revealed several countries experienced a sharp pullback in May with PPI contracting by 9.6% in Belgium, 6.9% in Spain and 6.8% in Italy. As a result, Eurozone PPI should contract by 1.5%, which would be the largest drop since November 2020.
Producer prices are an early indication of trends in consumer inflation, which the ECB wants to keep at 2.0% over the medium term, but which stood at 5.5% in June. A decline of PPI YoY would likely reinforce the idea that Eurozone CPI could further normalize donwward in the coming months.
In the meantime, European Commission highlighted that, in June, inflation expectations among consumers in the Eurozone have reached their lowest point since 2016, indicating that there is no sign of price increases becoming firmly established in the economy. Today, a fresh European Central Bank survey showed consumers lowered their inflation expectations for the next 12 months in May.
However, traders are still expecting ECB to raise rates in July, in line with policymakers’ statements and also in September. It would put the main refinancing rates 4.50%, likely above CPI YoY at that time.