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29 Jan 2016
Eurozone core inflation provides some relief for ECB hawks - ING
FXStreet (Delhi) – Teunis Brosens, Research Analyst at ING, notes that Eurozone headline inflation recovered to 0.4%YoY in January, up from 0.2% in December, Eurostat’s flash estimate shows.
Key Quotes
“The monthly bounces in the headline rate are less interesting from a monetary policy perspective, as they are often caused by volatile energy and food components. The much more important news is in core inflation, increasing to 1.0%YoY from 0.9% previously.
After two months of weakening core inflation, today’s increase, by 0.13%-pt to be precise, is as small as it is important. The key question that the ECB-council will assess in March is whether low oil prices are making their way into core inflation – the dreaded “second-round effects”. And the tentative answer of today’s inflation estimate is “No, oil is not dragging core inflation down just yet”. Both non-energy industrial goods and services saw inflation creep up, to 0.7% (from 0.5%) and 1.2% (from 1.1%), respectively. The movements are small, and inflation is still way below the “close to but below 2%” ECB-target, but at least we’re moving in the right direction again.
Financial markets remain quite pessimistic on the inflation outlook though: long-term inflation expectations (measured by 5y-5y forward inflation swaps) are now awfully close to their January 2015 low of 1.48%. That low was reached just before the ECB announced the start of QE.
All in all, this morning’s Eurozone data offer a bit for everyone: disappointing bank credit developments and a weakening of money growth, yet a better than expected performance of core inflation. Luckily for the ECB, they do not have to decide just yet based on today’s data: before the next 10 March ECB meeting, February monetary developments and inflation will be available as well, hopefully telling us more about those feared second-round effects.”
Key Quotes
“The monthly bounces in the headline rate are less interesting from a monetary policy perspective, as they are often caused by volatile energy and food components. The much more important news is in core inflation, increasing to 1.0%YoY from 0.9% previously.
After two months of weakening core inflation, today’s increase, by 0.13%-pt to be precise, is as small as it is important. The key question that the ECB-council will assess in March is whether low oil prices are making their way into core inflation – the dreaded “second-round effects”. And the tentative answer of today’s inflation estimate is “No, oil is not dragging core inflation down just yet”. Both non-energy industrial goods and services saw inflation creep up, to 0.7% (from 0.5%) and 1.2% (from 1.1%), respectively. The movements are small, and inflation is still way below the “close to but below 2%” ECB-target, but at least we’re moving in the right direction again.
Financial markets remain quite pessimistic on the inflation outlook though: long-term inflation expectations (measured by 5y-5y forward inflation swaps) are now awfully close to their January 2015 low of 1.48%. That low was reached just before the ECB announced the start of QE.
All in all, this morning’s Eurozone data offer a bit for everyone: disappointing bank credit developments and a weakening of money growth, yet a better than expected performance of core inflation. Luckily for the ECB, they do not have to decide just yet based on today’s data: before the next 10 March ECB meeting, February monetary developments and inflation will be available as well, hopefully telling us more about those feared second-round effects.”