Eurozone inflation hits 2.0% - ING

Peter Vanden Houte, Chief Economist at ING, suggests that the Eurozone inflation is making a comeback, with headline inflation jumping to 2% in February.

Key Quotes

“As underlying inflation remains very subdued at 0.9%, we don’t expect the ECB to alter its loose monetary policy in 2017. On the contrary, QE is likely to be lengthened once more, albeit with some tapering included.”

“Eurozone inflation is making a come-ack. HICP inflation came out at 2% in February, after 1.8% in January. This was in line with consensus. The main culprits for the higher inflation figure are the usual suspects: energy (+9.2% YoY) and fresh food (+5.2% YoY). Bear in mind that in February 2017 crude oil prices averaged €52.7/bbl, a nearly 75% increase from February last year. With oil prices now expected to stabilize around current levels in the coming months, the upward push on inflation will gradually peter out from the second quarter onwards. Fresh food prices have been pushed higher because of adverse weather conditions in Southern Europe, a phenomenon which is also likely to disappear in the coming months.”

“Underlying inflation (inflation without energy, food, alcohol & tobacco) stabilized at 0.9%. This remains way below the ECB’s "close to 2%" inflation target. In its communication the ECB has been putting increasing emphasis on the underlying inflation figure, since a pick-up in core inflation is key to having a more sustainable positive inflation figure. The European Commission’s economic sentiment survey has been showing a gradual improvement of pricing power amongst European businesses over the last few months. Excluding energy, producer prices rose 1.5% YoY in January, after 0.9 % in December. Falling unemployment is also likely to lead to higher wages. But even then, we expect underlying inflation to remain below 1.5% at the end of this year.”

“There is little doubt that the ECB will continue to be criticized for its loose monetary policy, especially in the core countries. But the bank will no doubt recall that the inflation target has to be reached over the medium term and for the whole of the Eurozone. If anything the ECB is more likely to err on the side of inflation, to compensate for the fact that consumer price increases have significantly undershot the ECB’s target for now 4 years in a row.”

“We therefore don’t see any change in monetary policy this year. However, in the third quarter, the ECB might announce its exit strategy, which in our view will probably entail a new extension of the QE program until mid-2018, but with some tapering included.”

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