Eurozone inflation: Not as bad as at first sight – Nordea Markets

Analysts at Nordea Markets suggest that weak core inflation of Eurozone in April was mainly due to temporary factors and there are some signs that inflation is gradually picking up in some sub-components.

Key Quotes

“Final Euro-area inflation numbers confirmed the flash estimates of 1.2% y/y headline inflation and 0.7% y/y core inflation (ex food, energy, alcohol and tobacco), as widely expected. Super core inflation (the approximate half of core inflation that is responsive to the business cycle) was unchanged at 1.1% y/y.”

“The details were rather hawkish. The notoriously volatile package holidays contributed quite a lot to the very low core inflation reading and that is easy to interpret as an Easter effect. Excluding package holidays, momentum in super core remained strong.”

“Moreover, the pickup in super core inflation continued in France and Italy, whereas super core inflation mostly slowed in Germany. The contribution from German inflation is already where it should be and the change that the ECB is hoping for in the coming months is a normalisation in France and Italy, where output gaps remain negative and where inflation is pulling the Euro-area aggregate down.”

Forecasts

Our forecast remains roughly unchanged: We see very low core inflation going into summer which will make the ECB opt for prolonging its QE programme after September by EUR 15bn per months for six months. Base effects will lift core inflation in autumn to levels that have to been seen for a few years, but that will remain too low for the ECB.”