As I expected, Eurozone HICP contracted more than expected in September. Flash estimate showed a decline of 0.3% YoY. If confirmed, it will be the second consecutive drop and the the largest decline since April 2016.

Even if this drop can be partly explained by downward pressures in energy (-8.2% YoY v -7.8% YoY in August), it also reflected a sharp slowdown in core inflation (ex food and energy), which increased by only 0.2% YoY (the slowest pace ever recorded).

This trend can be mainly explained by a temporary cut in German VAT and persistent weakness in hospitality sector that have affected transportation prices such as airfares and also hotels and restaurants prices. In a context where this situation is likely to persist and oil prices kept declining recently, Eurozone HICP should remain in negative territory or close to 0% until at least year end (confirming that the coronavirus shock has been deflationary). Therefore, as flagged by Frederik Ducrozet, latest ECB forecasts (released in September) already look optimistic.

In addition, looking at growth prospects, September data suggest that economic recovery lost momentum especially in services’ sector. Markit September flash PMI showed a decline to 47.6, a print below the expansion threshold of 50 and a 4-month low. Furthermore, high frequency data that I’m looking for in the hospitality sector flagged a downturn since mid-August. New restriction measures in Spain, France and Germany also imply a further deterioration in the coming weeks.

Therefore, the ECB is likely to revise downward both its inflation and growth estimates in December, when it will update its forecasts. In case there is no positive confidence shock (vaccine, treatment, etc.), the ECB should be tempted to take new measures in order to limit deflationary risks in the short term. Concretely, the ECB could review its inflation target or increase the size of its asset purchases program. This scenario is even more likely if the euro bounces around 1.20 against the dollar, a threshold from which many policymakers spoke in an attempt to contain upward pressures.