Spanish and Italian inflation wrap-up: Services and food driving inflation down

Taking into account today’s downward revision in Spanish HICP, we now revise our October French HICP forecast from -0.2% m/m (0.6% y/y) to -0.1% m/m (0.7% y/y) to be released tomorrow. As a consequence, we revise our expectations for French CPI to print at -0.1% m/m (0.6% y/y) from -0.2% m/m (0.5% y/y) and project the CPI ex tobacco index at 125.42 instead of 125.36. This nonetheless does not alter our view that euro area HICP inflation rate should come in unchanged at 0.7% y/y. If anything, we see slight downside risk to our 116.99 HICP ex tobacco projection.

Spain: Revised down to flat

Spain final October HICP was revised down to 0.0% y/y from a 0.1% y/y preliminarily estimate (the index has been revised down 6bps), hence dropping 0.5pp from September.

Two main contributors to the headline fall were services and food prices, NEIG prices also contributed but to a much lower extent.

Looking at the full HICP breakdown, we gather that NEIG prices were down from last year, falling further into negative territory to -0.13% y/y after -0.07% y/y in September. Durable goods supported this trend, declining by 0.1pp to -1.7% y/y. Non-durable goods contributed even more significantly, dropping three-tenths to 0.9% y/y.

We calculate that services were the largest contributor to the headline fall, dropping from 0.9pp to -0.1% y/y, on account of a fairly broad-based decline by its subcomponents. We particularly note a 0.8pp fall in transport services to 1.2% y/y, -7.7pp to 2.0% y/y in education (confirming the highlight of the flash press release), -0.5pp to 1.6% y/y in package holidays, -1.6pp to -7.4% y/y in communication, -0.7pp to 0.3% y/y in recreational and personal services.

Inflation in food, drink and tobacco also declined by a noticeable 0.8pp to 2.1% y/y, supported by falls in both unprocessed (-1.3pp to 1.5% y/y) and processed (-0.5pp to 1.7% y/y) food prices.

Finally, energy inflation rate prices rose by 1.0pp in October, but nonetheless kept the inflation in negative territory at -2.8% y/y.

Italy: Inflation revised up 0.1pp to 0.8% y/y – Evidence of a negligible VAT rate hike pass-through

The Italian final October HICP inflation rate was revised up by 9bps to 0.76% y/y. We note that historical subcomponents indices have been revised since the beginning of the year (although not the headline index).

Particularly, we note that housing, water, electricity and gas; Hotels, restaurants and public services; other goods and services; as well as alcoholic beverages and tobacco have been revised up.

Looking at the high-level components, NEIG prices have been slightly more buoyant than our expectations, rising by 0.2pp to 0.9% y/y. However, we continue to believe that the pass through of the 1pp VAT rate hike has been negligible as the monthly increase (1.2% m/m) is 0.3pp, below the historical monthly rise in the past five years. Particularly, the garment price category actually rose less than last year. This was somehow offset by a record increase in recording media (12.2% m/m).

Outturns in the services sector were broadly in line with our expectations (-0.4% m/m), consistent with an inflation rate dropping from 1.6% to 1.4%. This decline was supported by both transport services prices (-0.3pp to 2.8% y/y), communication prices (-2.4pp to -8.5% y/y) and education (-1.5pp to 1.4% y/y)

On the volatile component front, food, drink and tobacco came in line with our expectations, falling by 0.6pp to 1.6% y/y driven down by a major fall in unprocessed food prices (-1.5pp to 1.9% y/y), while processed food prices actually increased from 1.5% y/y to 1.6% y/y.

As we expected, energy prices rose slightly on the month, but nonetheless were consistent with a -1.4pp fall in the inflation rate to -2.4% y/y.