Rebound in euro area core inflation

While core inflation was slightly stronger than expected in June, we believe it will rise only slowly for the rest of this year.

Euro area ‘flash’ HICP inflation eased to 1.3% y-o-y in June (down from 1.4% in May) while core inflation increased to 1.1% (up from 0.9% in May). Both figures were slightly above consensus expectations, but our overall assessment is unchanged. The bottom line from the June inflation report is that the broad picture remains unchanged – we continue to expect euro area core inflation to rise only very slowly in the months ahead.

The main boost to core inflation in June came from services inflation, which rebounded to 1.6%, from 1.3%. This was probably due to exceptional factors such as the timing of the Pentecost holiday in Germany or the sales discount in France, with a modest setback possible next month.

Unless oil prices rebound and/or the currency depreciates significantly from here, headline inflation is at risk of falling more significantly at the beginning of 2018 and the ECB staff forecasts could be lowered in September. This strengthens our view that a QE tapering announcement is likely to be postponed to October or December 2017.

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