Danske Research Team
Danske Bank A/S
Inflation outlook
Euro inflation remained very low at 0.5% in June and is still far below the ECB’s target. In response, the ECB eased monetary policy with a package of measures in June. We believe the measures will gradually support inflation but it will take some time (see ECB Research: Implications of the ECB easing measures, 6 June, and ECB Research: Draghi reveals favourable TLTRO details, 4 July).
We expect inflation to stay around current levels in Q3 but we see downside risk to our July forecast. Later this year, we forecast an increase to 0.9%, partly as higher global food prices are set to increase food consumer prices. When the impact of the ECB’s policy kicks in and the recovery gains momentum higher wage growth should support inflation. Overall, we expect inflation to be 0.7% in 2014, increasing to 1.1% in 2015.
The low inflation is not contradicting stronger growth in the euro area. Lower commodity prices have increased purchasing power and real wage growth is positive. This is a clear improvement from the declines in real wages in 2011-12. However, the negative impact of the exchange rate on inflation also drags down GDP growth.
Deflation index
In Danske Bank’s Euro Area Deflation Index, all countries have a score lower than zero. The euro area score has declined to -6, although inflation was unchanged in June. The decline came mainly as nominal wage growth declined to 1.3% in Q1.
The scores of the core countries are low but overall are held up by activity indicators. The German score remains negative despite an increase in inflation of 4pp. The Netherlands has the lowest score at -8, as inflation excluding taxes is at the deflation limit.
The periphery countries are at the low end of the index and inflation is set to remain low as high unemployment limits wage pressure. This is partly a result of an adaptation of competitiveness, which is necessary to restore sustainable economic growth.
This publication has been prepared by Danske Bank for information purposes only. It is not an offer or solicitation of any offer to purchase or sell any financial instrument. Whilst reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and no liability is accepted for any loss arising from reliance on it. Danske Bank, its affiliates or staff, may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives), of any issuer mentioned herein. Danske Bank's research analysts are not permitted to invest in securities under coverage in their research sector.
This publication is not intended for private customers in the UK or any person in the US. Danske Bank A/S is regulated by the FSA for the conduct of designated investment business in the UK and is a member of the London Stock Exchange.
Copyright () Danske Bank A/S. All rights reserved. This publication is protected by copyright and may not be reproduced in whole or in part without permission.
Recommended Content
Editors’ Picks
EUR/USD holds above 1.0700 after German inflation data
EUR/USD trades modestly higher on the day above 1.0700. The data from Germany showed that the annual HICP inflation edged higher to 2.4% in April. This reading came in above the market expectation of 2.3% and helped the Euro hold its ground.
USD/JPY recovers above 156.00 following suspected intervention
USD/JPY recovers ground and trades above 156.00 after sliding to 154.50 on what seemed like a Japanese FX intervention. Later this week, Federal Reserve's policy decisions and US employment data could trigger the next big action.
Gold holds steady above $2,330 to start the week
Gold fluctuates in a relatively tight channel above $2,330 on Monday. The benchmark 10-year US Treasury bond yield corrects lower and helps XAU/USD limit its losses ahead of this week's key Fed policy meeting.
Week Ahead: Bitcoin could surprise investors this week Premium
Two main macroeconomic events this week could attempt to sway the crypto markets. Bitcoin (BTC), which showed strength last week, has slipped into a short-term consolidation.
Five Fundamentals for the week: Fed fears, Nonfarm Payrolls, Middle East promise an explosive week Premium
Higher inflation is set to push Fed Chair Powell and his colleagues to a hawkish decision. Nonfarm Payrolls are set to rock markets, but the ISM Services PMI released immediately afterward could steal the show.