Eurozone: Core inflation surprised on the upside – Danske Bank

Pernille Bomholdt Henneberg, Chief Analyst at Danske Bank, explains that the Eurozone’s core inflation surprised on the upside but this is not the first sign of higher underlying price pressure.

Key Quotes

“Euro area inflation increased to 1.9% y/y in April from 1.5% y/y in March while core inflation jumped to 1.2% y/y from 0.7% y/y, thereby reaching the highest level in four years. The higher core inflation reflected higher service price inflation, which rose to 1.8% y/y from 1.0% y/y, while non-energy industrial goods price inflation remained subdued at 0.3% y/y.”

“The question remains whether the higher service price inflation reflects a rise in underlying price pressure, which would change the ECB’s monetary policy stance. Based on our calculations, a very large part of the rise in service price inflation is due to the early Easter last year, which is also reflected in the details about the German CPI inflation. Here, package holidays added 0.9pp to HICP service price inflation in April, up from a drag of 0.6pp in March. As German HICP accounts for 28% of euro area inflation, 0.4pp of the 0.8pp rise in euro area service price inflation is due to German package holidays.”

“Among the remaining components of service price inflation we see few signs that the underlying price pressure has started to pick up. The largest component of service price inflation is recreation and personal care excluding package holidays. This figure was still hovering around a historically low level in March, likely reflecting the lack of underlying price pressure. On the other hand, the higher oil price has indirectly supported service price inflation through transport prices and this likely also contributed to the higher figure in April. However, as the oil price has stabilised, the indirect support should start fading in H2 17 given that the underlying price pressure is still subdued as we expect. (The euro area inflation details for April are released 17 May).”