Eurozone Inflation Preview: Draghi already said it is way off the target

The Eurozone inflation is expected to rise 0.2% over the month in February while rising 1.2% over the year, the Eurostat is scheduled to report this Friday at 10:00 GMT. After inflation fell sharply in January with prices falling -0.9% compared to December return of the upward path is a favorable signal in relation to monetary policy, especially with core inflation excluding food and energy prices are expected to match the total inflation rising 1.2% y/y.

With the favorable macroeconomic framework in the Eurozone and multiple upward revision to the growth forecast by the ECB and the transnational organisations like International Monetary Fund (IMF) and the Organisation for Economic Cooperation and Development (OECD), the key question is how quickly stronger demand will translate into rising prices in order to poke the ECB to act. Solid economic growth and labor market slack absorption are not translating into higher price level for now and it is unlikely to materialize anytime soon. In combination with the oil prices trading lower in February when compared to January, the Eurozone February inflation data are tilted for the negative rather than a positive surprise for both the ECB and the Euro.

The latest ECB staff macroeconomic projections see a pickup in headline inflation from an average rate of 1.4% this year to 1.7% in 2020, but in comparison with the December 2017 macroeconomic projections, the outlook for headline inflation has been revised down slightly for 2019 and remains unchanged for 2018 and 2020. Moreover, the inflation outlook remains muted with rates of headline inflation likely to hover around 1.5% for the remainder of this year.

Looking ahead, inflation is in ECB’s view expected to rise only gradually over the medium term, with all the non-standard monetary support of the asset purchasing program and the continuing economic expansion that the corresponding absorption of economic slack and rising wage growth.

According to ECB President Mario Draghi, a low underlying inflationary pressure is a result of the labor market and economic slack and “have yet to show convincing signs of a sustained upward trend.” Draghi also confirmed that the currency strength might be a source of low inflation while promising predictable monetary policy, stressing that ECB still needs to see evidence that inflation dynamics are moving in the right direction before pondering policy changes. Draghi’s comments confirmed ECB’s Lane opinion voiced this Tuesday that the pace of the euro’s move is more important than the level.

As the Eurozone inflation is the average of all national averages and it tends to be very predictable, rarely deviating from the market expectations, not much of a surprise factor is stemming from this report. This is also underlined by the fact that the top ECB officials are constantly using very conservative outlook while talking about inflation, as the primary target of ECB’s monetary policy.

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