Daily Insight
Group Economics Macro & Financial Markets Research
6 January 2016
The ECB’s target is close to 2%...apparently Nick Kounis
Eurozone inflation remains stuck close to zero, while core inflation shows
Head of Macro and Financial Markets Research Tel: +31 20 343 5616
little sign of an uptrend
Inflation expectations have continued to drop reflecting diminishing confidence in the ECB’s price stability goal
nick.kounis @nl.abnamro.com
We think the rising risk of a continued undershoot of the inflation target over the medium term will eventually trigger further ECB stimulus
Eurozone inflation remains stuck at lows The flash estimate of HICP brought more disappointing news on inflation. The headline measure remained stuck at 0.2% yoy in December. This compared to the consensus expectation of a rise to 0.3% yoy. There was a widespread expectation that headline inflation would bounce significantly around the turn of 2016 as energy price deflation eased. However, the ongoing fall in oil prices is dampening this effect. In addition, a slowdown in food price inflation worked in the other direction in December.
Eurozone lowflation % yoy
4 3 2 1 0 -1 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 Total Core rate ECB target Source: Thomson Reuters Datastream
Core does not provide much comfort The idea that energy and now food prices are depressing inflation – items that tend to be volatile and have a relatively short-lived impact – might be considered some sort of comfort. However, this is not really applicable in this case. Core inflation remained
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Daily Insight – The ECB’s target is close to 2%...apparently– 6 January 2016
unchanged at 0.9% yoy in December, at less than half the ECB’s priced stability goal. In addition, had it not been for the fall in oil prices, eurozone domestic demand and hence underlying inflationary pressures may have been weaker still. It would be hoped that domestic price pressures would start to build going forward given the economic recovery. However, this process tends to be slow. Indeed, service sector inflation fell to 1.1% yoy in December from 1.2% yoy. Overall, core inflation only just remained stable because core goods price inflation was unchanged at 0.5% yoy. However, there is a risk that these start to slow as well because the impact of the past fall in the euro on import prices is starting to dissipate.
Eurozone core import price inflation fades % yoy
8
2.0
6
1.5
4 2
1.0
0
0.5
-2 0.0
-4
-0.5
-6 06
07
08
09
10
11
import prices ex-energy (lhs)
12
13
14
15
16
core cpi ind goods (rhs)
Source: Thomson Reuters Datastream
A question of credibility All this suggests that headline inflation will remain close to current low levels in the coming months. The risk that the ECB will continue to undershoot its target of ‘close to but below 2%’ is significant and rising. One element the ECB needs to take particularly seriously is inflation expectations, which have fallen from already low levels. The credibility of the price stability goal is under threat. More monetary stimulus Given this background we think the ECB will step up its monetary stimulus in the coming months. Lowering the deposit rate further into negative territory seems a more likely tool than a further stepping up of QE.
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Daily Insight – The ECB’s target is close to 2%...apparently– 6 January 2016
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