Why This Morning’s Surprising Fall In European Inflation Won’t Halt Trichet’s Tightening

This morning’s surprising miss in the European inflation number suggests the ECB won’t need to tighten anytime soon, something president Jean-Claude Trichet hinted at last week.

But there’s reason to believe we’re going to see an uptick in inflation over the summer, and the temptation return for the ECB to take action.

From Societe Generale’s Klaus Baader:

While the decline in euro area inflation is clearly good news, especially for Europe’s hard-up consumers, we doubt that April’s 2.8% rate was the peak in thus cycle. Rather, we expect inflation to hit 2.9% or 3.0% during the summer. The reasons for this expectation are that oil prices have picked up again, and that there are some very unhelpful base effects influencing the next few months’ headline rates, which reflect declines in oil prices in May- July 2010. At the same time, we see some upside risks to food prices, coming mainly from higher energy costs.

So while the risk of another rate hike in June is extremely low, July and potentially August may offer the ECB an opportunity to act again.

Note the recent weakening in the euro, as a result of instability over Greece and the ECB stepping back from another rate hike. The euro has, overall, strengthened, since Trichet signaled the first rate hike in March, and acted in April.