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Eurozone Inflation on Gradual Fall: Should Markets Be Concerned?

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Eurozone inflation in January 2018

On a year-over-year basis, the Eurozone inflation (VGK) (IEV) index stood at 1.3% in January 2018 compared to 1.4% in December 2017, according to data provided by Eurostat. The index didn’t meet the preliminary reading of a 1.4% rise. Inflation has been falling gradually since November 2017.

Inflation in January was mainly due to a softer rise in prices for energy and food products. Core inflation, which is an important measure on which the European Central Bank bases various policy decisions, excludes energy, alcohol, tobacco, and unprocessed food. Yearly core inflation was 1% in January 2018 compared to 0.9% in December 2017.

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Economic impact

The gradual fall in the Eurozone’s inflation figure is signaling that wage growth is not improving. Weaker inflation is a major concern for the economy. On the other hand, the US economy is experiencing a gradual rise in its inflation index, which is helping the Fed continue its gradual interest rate hike process.

Many market participants expect the Fed to be more aggressive in its future rate hikes. However, the ECB (European Central Bank) hasn’t started its tightening process yet. This divergence in monetary policy could be precarious for global markets.

The Vanguard FTSE Europe ETF (VGK) and the iShares Europe ETF (IEV), which tracks the performance of the Eurozone (N100-INDEX), rose 5.6% and 5.5%, respectively, in January 2018.

In the next part of this series, we’ll look at the Eurozone consumer confidence so far in February 2018.

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