Eurozone: Weakening inflation raises eyebrows – ING

FXStreet (Delhi) – Teunis Brosens, Senior Economist at ING, notes that the Eurozone headline inflation came out at 0.2% YoY in December, unchanged from November, but weaker than expected.

Key Quotes

“The weaker outcome is partly explained by the volatile inflation components: food, alcohol and tobacco prices rose by only 1.2% YoY in December, down from 1.5% YoY previously. Energy prices also continued to contribute negatively, falling by -5.9% YoY (-7.3% YoY previously).

Yet the action is not confined to the volatile inflation components alone: concealed behind the rounded figures, core inflation slipped to 0.86% YoY from 0.93% YoY previously, the weakest figure in six months. Services price inflation too weakened for the second month in a row. The threat of negative second-round effects undermining non-energy inflation obviously cannot be ignored.

With the oil price languishing below US$40/bbl, headline inflation looks set to remain low in the months ahead. Unless oil prices rise from current levels, headline inflation might even briefly dip below zero again in the summer. So was Draghi right after all, when back in October he worried about the “strength and persistence of the factors that are currently slowing the return of inflation to levels below, but close to, 2%”?

To answer that question, the development of core inflation is key. It was hovering around 0.9% for most of 2015. Doves may conclude that the failure of core inflation to move above 1.0% shows that the ECB’s December moves were right, and that even more might be warranted to prevent negative second-round effects from getting a grip on inflation.

Yet hawks may argue that weak core inflation is unsurprising given the still high unemployment in many Eurozone countries. Moreover, despite this month’s weakening of core inflation, the presence of second-round effects is not yet convincing. Moreover, cheap energy remains a positive for now, continuing to boost purchasing power in the Eurozone. We think that the ECB will hold its fire for now: it will take more convincing evidence of second-round effects or other really disappointing economic news to stir the central bank into further action.”

Teunis Brosens, Senior Economist at ING, notes that the Eurozone headline inflation came out at 0.2% YoY in December, unchanged from November, but weaker than expected.

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