Schroders Quickview: Eurozone inflation returns
What is keeping eurozone inflation low?
HICP inflation was a little higher than consensus estimates of 0.2%, but remains low enough to warrant caution.
Lower global energy prices have been dragging eurozone inflation lower for some months now, and continue to make a negative contribution worth about 0.7%.
Inflation in food, alcohol and tobacco had also been a drag at the start of the year; however, inflation in these sub-indices has been rising lately, partly reflecting the recovery in the region’s growth, but also partly due to the depreciation in the euro in recent months.
Is deflation still an issue?
More importantly, the core rate of inflation (excluding food, alcohol, tobacco and energy) increased from 0.6% to 0.9% - supporting our view that deflationary pressures are not a major concern for the monetary union.
Indeed, as we head into the second half of the year, we expect to see headline inflation head higher, and by early next year, catch up with the core rate, especially as the recent fall in global energy prices drops out of the annual comparison.
How does the current economic plight in the eurozone compare with Japan?
As prices have fallen over the past couple of quarters, households have used the extra real disposable income to purchase more goods and services.
They did not save those gains in anticipation of further deflation – an important distinction from the Japanese experience.
Will the latest inflation data have any impact on the European Central Bank's monetary policy?
For the European Central Bank (ECB), the faster than expected rise in inflation is unlikely to change its outlook or path of monetary stimulus.
The ECB always had a more optimistic forecast than the consensus, and so will not be overly surprised that growth and inflation are improving. We expect the ECB to continue its quantitative easing programme until September 2016.
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