Eurozone inflation should rise sharply, but not sustainably – Danske Bank

Research Team at Danske Bank, suggests that following four months of negative Eurozone’s inflation prints, they expect a significant increase in inflation during the rest of the year.

Key Quotes

“We look for inflation at 1.0% in December this year rising further to 1.5% in February next year after a period when inflation has not been above 1.0% for four consecutive years.

The sharp increase in inflation reflects a fading drag from energy prices after the oil price has risen to the highest level since the end of 2015. Our inflation forecast is based on a continued slow increase in the oil price and based on this path, headline inflation should peak in Q117 reflecting the strongest support from base effects when the oil price was at its lowest level at the beginning of 2016. After this, headline inflation should decline slightly before stabilising just above 1.0%.

A more sustained increase in headline inflation requires that core inflation also picks-up from the current low level. We do believe, that it will increase slowly towards the end of this year as the stronger recovery and lower unemployment rate support the domestic driven part of core inflation. However in the near term, we estimate that such support will be countered by a negative impact from the stronger effective euro while there should also be a continued downward pressure due to a lagged, indirect impact from the oil price decline via production costs.”