Global Daily – Eurozone inflation rebounds

by: Aline Schuiling , Bill Diviney

Euro macro: Eurozone inflation to rise in the direction of 2% in May – Preliminary data from Germany, Belgium and Spain indicate that eurozone inflation jumped higher in May. Harmonized HICP inflation increased from 1.4% in April to 2.2% in May in Germany and from 1.1% to 2.1% in Spain, while the CPI inflation rate in Belgium rose from 1.5% to 1.8%. The detailed regional data from Germany clearly indicate that the jump in inflation resulted from a higher inflation rate in package holidays (which was depressed in April due to the timing of Easter) and a rise in energy price inflation. Also, Spain’s statistical bureau mentioned in its press statement that inflation rose mainly on the back of higher energy prices inflation. Tomorrow (31 May), the preliminary data for inflation in the eurozone as a whole will be published. We expect headline inflation to jump from 1.2% to 1.8%, but the rise in core inflation is expected to remain more modest, from 0.7% to 0.9%. Indeed, core inflation has been hovering around a level close to 1% since the middle of 2015. Looking ahead, base effects in oil prices are expected to lift headline inflation somewhat further in the coming months, but – given our scenario for oil prices – this effect is expected to peter out after summer, when energy price inflation should come down again. With regard to core inflation, we expect this to remain close to its current level in the next few months. Wage growth, which is the key driver of core inflation, remains subdued in the eurozone as a whole, given that – on aggregate – there is still slack in the labour market. Our base line scenario is that core inflation will rise slowly from around the autumn of this year, but that it will remain well below the ECB’s target throughout 2018 and 2019. (Aline Schuiling)

​US Macro: ‘Just right’ inflation to keep gradual rate hikes on track – The Fed’s preferred measure of inflation, core PCE, will be released tomorrow for the April period. Both we and consensus expect inflation to tick down a notch to 1.8% yoy from 1.9%, consistent with the weak CPI reading earlier in the month. Although April was a weak month for inflation, however, the data has been surprisingly firm overall this year, with CPI inflation hitting 2.1% in April, up from 1.8% in January. What has driven this strength, and will it continue? As we discuss in our US Watch (see here), aside from favourable base effects the main strength has come from housing rents and core goods (eg. apparel and used cars). We expect this strength to persist, and as a result, we have raised our core CPI forecast by 40bp to 2.1% for 2018. Despite the unexpected strength this year, there remains little sign of the tight labour market exerting upward pressure on inflation. As such, while the recovery in inflation will give the Fed greater confidence to continue gradual rate hikes (we expect five more 25bp hikes at each press conference meeting to June 2019), we do not view it as a sign that inflation is on the verge of picking up significantly. For a sustained pickup, we believe we would need to see a meaningful recovery in unit labour cost growth – something that still appears some way off. (Bill Diviney)