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Eurozone inflation: Worrying weakening in December – ING

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Jan 5, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    FXStreet (Delhi) – Teunis Brosens, Research Analyst at ING, notes that the Eurozone headline inflation came out at 0.2%YoY in December, up from 0.1% in November, but weaker than expected.

    Key Quotes

    “The weaker outcome is mostly explained by the volatile inflation components: food, alcohol and tobacco prices rose by only 1.2%YoY in December, down from 1.5% 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: the threat of second-round effects undermining core inflation cannot be dismissed. Concealed behind the rounded figures, core inflation slipped to 0.86%YoY from 0.93% previously, the weakest figure in 6 months. Services price inflation too weakened to 1.1%YoY from 1.2% previously.

    With the oil price languishing below $40, headline inflation looks set to remain low in the months ahead. Unless oil prices rise, 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 has been 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 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. 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 ECB into further action.”
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