Danske Research Team
Danske Bank A/S
Euro HICP inflation declined further into deflation in January, when it was -0.6% y/y down from -0.2% y/y in December.
The deflation was mainly driven by negative energy price inflation due to the sharp decline in the oil price. Energy prices declined 2.8% m/m in January, implying the yearly rate of inflation was -8.9% y/y from -6.3% y/y in December. Energy price inflation may decline further, as some of the impact of the decline in the oil price comes with a lag.
Core inflation declined to a new historically low of 0.6% y/y in January. The decline in core inflation is likely to reflect some indirect and second-round effects of the decline in the oil price. (Note, there was a mistake in the first release from Eurostat, as it said core inflation was 0.5%. It has now confirmed that core inflation was 0.6% in January, see News Release).
Although core inflation is at a historic low, euro deflation is still mainly driven by low energy price inflation, and real wage growth is higher than it has been for a long time. The improvement in consumers’ purchasing power is reflected in retail sales, which increased 0.6% m/m in both October and November. We expect a third increase in a row in December (due for release next week).
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