Eurozone: Inflation data confirms weak underlying inflation pressures – MUFG

Derek Halpenny, European Head of GMR at MUFG, suggests that the flash estimate for euro-zone CPI revealed a further divergence between overall inflation and underlying inflation that strips out the volatile elements, including energy.

Key Quotes

“The overall annual inflation rate hit 2.0% for the first time since January 2013 and based on the ECB’s official target reference of “close to but below 2.0%” we can conclude that annual inflation is now slightly overshooting the ECB target. However, we can’t read too much into that. The consistent rhetoric amongst senior ECB council members indicates that there are doubts over how sustainable this upturn can be. That has been the basis of justifying the continuation of aggressive monetary easing.”

“We believe there is good reason for this caution. You may recall that under former ECB President Trichet the ECB raised the refinancing rate by 0.25 point on two occasions in April and July 2011. Overall annual inflation was above target at 2.8% and 2.5% respectively in the months when the ECB hiked. However, the core CPI was considerably lower at 1.6% and 1.2% respectively. Energy was the big factor in lifting overall inflation back then and those rate hikes proved a big mistake.”

“With the core annual inflation rate still stuck at 0.9% (for the third month in a row) and just 0.3ppt off the record low, we do not expect the same haste from the ECB. At least two if not three months of increases will probably be required before the ECB is confident to alter its communication on the policy outlook. Yesterday’s inflation data only strengthens the argument for continued aggressive ECB monetary easing that will ensure continued downside risks for the euro.”