Eurozone: Combination of cyclical weakness and slack weighing on inflation – ABN AMRO

Analysts at ABN AMRO are thinking that the Eurozone’s headline inflation was probably stable (at 1.5% yoy), though core inflation likely slipped to 0.9% yoy, when the flash estimate for March is published the coming Monday.

Key Quotes

“Early data from selected member states went in different directions (German HICP down to 1.5% from 1.7%, Spain up to 1.3% from 1.1% and Belgium CPI to 2.3% from 2.2%). The softness in the core partly reflects German package holidays, though underlying trends remain extremely subdued.”

“Despite recent ECB downgrades, we continue to think the central bank remains too optimistic in expecting core inflation to embark on a clear upward trend over its forecasting horizon. One factor behind this view is that we continue to see slack in the eurozone labour market on aggregate.”

“We think that the moderate rise in wage growth we have seen is a catch up to past rises in headline inflation rather than a reflection of labour market tightness. Indeed, we think that wage growth will slow going forward. Core inflation is likely to remain flattish in coming quarters.”

“Given lower than expected underlying inflationary pressures in a number of developed economies that are more advanced in their cycle than the eurozone, it seems rather heroic to expect a significant acceleration in core inflation in the eurozone.”