Underlying inflation dynamics to remain subdued in the Euro area – Goldman Sachs

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Dec 18, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Delhi) – Research Team at Goldman Sachs, notes that in 2015, Euro area headline inflation was ‘tossed’ (owing to volatile commodities prices), but did not ‘sink’ into negative territory.

    Key Quotes

    “Instead, ‘core’ inflation (on measures excluding energy and food prices) rose – albeit at a very gradual pace – over the course of the year, reaching +1.0%yoy at end-2015. While still well below rates consistent with the ECB’s price stability objective, the stabilisation of core inflation has been widely seen as a reassurance that the risk of outright deflation has abated.

    Euro depreciation offered temporary support to inflation

    But the recent firming of Euro area core inflation reflects in part the depreciation of the Euro exchange rate since mid-2014. In most cases, currency depreciation provides a positive but temporary support to domestic core inflation. On that premise (and all else equal), core inflation may again drift lower as the transient Euro-driven support ebbs away: underlying price dynamics are weaker than current core measures suggest.

    Breakdown suggest Euro effect important but not sole driver

    We examine 255 price series accounting for more than 80% of the Euro core HICP basket. Our identification scheme suggests that the Euro’s depreciation has had a non-negligible impact in France and Germany. In Spain, however, above-trend inflation rates in the more domestically oriented sectors indicate that the Euro has not been the only driver. By contrast, Italian inflation has remained subdued across sectors. These contrasting dynamics suggest that the Euro has been an important, but not the sole, driver of Euro area inflation.

    Measure of underlying price pressures points to persistently subdued Euro area inflation in 2016

    We construct a statistical measure of underlying inflation, which distinguishes shorter-term term influences from longer-term ones. On this basis (and in line with our forecasts), we find that Euro area core inflation is likely to grind slightly higher over the course of 2016, albeit at a very modest pace. Together with the renewed fall in oil prices, inflation is therefore likely to remain at stubbornly low levels, well below the ECB’s target.”
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