Euro inflation set to increase in February – but to remain in deflation

HICP inflation in Germany, Italy and Spain all surprised on the upside in February. On average, the actual prints were 0.4pp higher than forecast by consensus. The higherthan- expected inflation figures seemed to reflect the increase in the oil price during February, which has lifted gasoline prices and thus supported energy price inflation. Added to this it also seemed that food price inflation was higher than expected.

Based on the country figures released today, we expect euro inflation to increase to -0.2% y/y in February from -0.6% y/y in January (due for release on Monday). Hence, the euro area should remain in deflation in the near term, but the country figures released today suggest the period of deflation will be shorter than we had initially expected.

The relatively large, positive surprise reflects that food and energy price inflation are very volatile and account for the largest share of the absolute monthly variation in annual inflation. Energy price inflation explains above 50% of the monthly variation in annual headline inflation although it only has a weight of 10% of headline inflation.

German HICP inflation increased to -0.1% y/y in February from -0.5% y/y in January. The increase was rather broad based with higher inflation in the volatile energy and food prices and also in the core components. Looking at the monthly changes, there was an increase in household energy and fuels of 2.1% in February after a decline above 3.0% in both January and December.

Italian HICP inflation printed at +0.1% y/y in February, hence the country was not in deflation in February. In January inflation was -0.5% y/y and the 0.6pp increase followed a combination of higher food and energy price inflation. Housing, water, electricity and fuel prices increased 0.1% m/m, which was larger than we had expected. At the same time food prices increased again in February and the yearly change turned positive.

Spanish HICP inflation increased to -1.2% y/y in February from -1.5% y/y in January. In Spain the details have not been released yet, but there has been an increase in gasoline prices during February and we expect the higher inflation figure to reflect higher energy price inflation.