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Eurozone: Unpleasant deflationary surprise - ING

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Mar 1, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    Teunis Brosens, Senior Economist at ING, suggests that weakening of core inflation gives ECB doves the upper hand next week.

    Key Quotes

    “The Eurozone dipped back in deflation territory. Contrary to expectations, headline inflation fell back to -0.2% YoY in February. While a negative contribution of energy prices was expected, the real and very unwelcome surprise is that core inflation is down to 0.7% YoY, the weakest reading since April last year.

    While details are not available in Eurostat’s flash estimate, the weakening of core inflation appears to be broad-based. Both non-energy industrial goods and services inflation weakened in February. Moreover, the weakening of core inflation is in line with, eg, continuing weakness of producer prices and PMI survey responses on prices.

    The attitude towards inflation in the Eurozone remains paradoxical. At face value, the fact that headline inflation averaged 0.0% over the past 15 months is great news for consumers. In fact, the boost low inflation has given to purchasing power has helped consumption to become the main driver of growth in the Eurozone. But February’s deflation surprise will focus minds again on the negatives of low inflation.

    The weakening of core inflation shows the real and present danger that cheap oil will cause low inflation to become ingrained in Eurozone price and wage dynamics. This is especially bad for debt-laden households, businesses and governments in Southern Europe, which will have little scope to “inflate away” their debt burden by increasing nominal wages. Doves will now have the upper hand at next week’s ECB-meeting, tilting the balance towards more aggressive monetary easing policies.”
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