Eurozone core inflation to remain close to 1%

by: Aline Schuiling , Bill Diviney

Euro Macro: Eurozone core inflation to jump higher in April – Eurozone HICP inflation for April will be published on Friday. A large number of individual countries have already published data over the past couple of days, most importantly Germany. Headline inflation in Germany jumped to 2.1%, up from 1.4% in March. The regional detailed inflation reports that were published earlier this week revealed that the rise in inflation was almost entirely due to the volatile package holidays component, which jumped to +11.2% yoy in April, from -6.4% yoy in March. This jump contributed around 0.5pp to the total 0.7pp rise in inflation, with the rest mainly resulting from a temporary shift in discount sales of clothing and shoes. The impact of Germany’s package holidays was also underlined by the inflation rates that were published in other countries, such as France, Italy and Belgium which all increased by merely 0.1pp in April. Finally, in Spain, inflation increased more noticeably (to 1.6% from 1.3%), but according to a written statement by Spain’s statistical office, this was also due to an increase in the prices of tourist packages. Given Germany’s heavy weight in the eurozone aggregate, eurozone inflation is also expected to rise. We expect the headline rise from 1.4% to 1.6%, and core inflation to rise from 0.8% to 1.0%, although the risks look tilted to the upside. Looking forward, we expect core inflation to remain close to 1.0% throughout this year and to pick up modestly next year. (Aline Schuiling)

BoE View: Limited scope for tightening, despite building price pressures – The Bank of England kept policy on hold today, and in its Quarterly Inflation Report, upgraded its GDP forecasts on the back of Brexit-related stockpiling, which has boosted growth in Q1 according to the Jan-Feb data (the preliminary estimate for Q1 will be published on 10 May). In the press conference, Governor Carney continued to note concern over the pernicious effects of Brexit on investment – which surveys suggest will fall for the longest period since the Second World War – but also said that interest rates would have to rise at a quicker pace than that currently expected by financial markets (currently just one hike by end 2021), should an orderly Brexit prevail. This is due to the buildup of domestic inflationary pressure, partly on the back of the aforementioned decline in investment, which is weighing on productivity and pushing unit labour cost growth higher. Indeed, while near-term projections for inflation were revised down, due to lower projected oil prices, the Inflation Report fan charts indicate an upward sloping trajectory towards the end of the forecast horizon, in contrast to the flat trajectory in the February inflation report. With that said, inflation at the end of the BoE’s forecast horizon – in Q2 2022 – is still projected at just 2.2%, only marginally above its 2% target. As such, and given the headwinds the economy faces – not just from Brexit, but a weak global trade environment, and a cooling housing market – we continue to expect relatively subdued growth and inflation over the coming quarters, with just one rate hike from the BoE next year. (Bill Diviney)