Distorted rebound in core euro area inflation

The set of economic indicators released this morning was generally encouraging from the European Central Bank’s point of view, but the “upward adjustment” in core inflation still has a way to go.

The big story from today’s set of economic data releases was the sharp rebound of euro area core HICP inflation, from 0.7% to 1.2% in April. While the ECB should welcome the news, our analysis points to large statistical distortions which will likely be reversed in the months ahead.

We expect euro area core HICP inflation to return to the lower end of a 1.0-1.2% range for the next six months, before we see a more convincing pick-up by the end of the year. Our annual core inflation forecasts for 2017 and 2018 remain close to, but below the ECB staff projections, at 1.1% and 1.3%, respectively. On the bright side, downside risks have diminished further.

In short, it is far too early to tell whether this marks the beginning of a “self-sustained upward adjustment” in core inflation. The ECB will likely tread very carefully when it comes to debating its exit strategy, with discussions likely to start in June.

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