Euro area deflation monitor

Inflation outlook

Euro inflation declined to a new cycle low of 0.4% in July and, excluding taxes, was only 0.2%. The persistent low inflation has resulted in a considerable decline in marketbased inflation expectations during August, but the ECB-preferred inflation expectation measure, the Survey of Professional Forecasters, showed small increases for long-term expectations in Q3 and Mario Draghi did not sound concerned at the latest ECB meeting.

We expect a further decline in inflation to 0.3% in August (released 29 August), which could result in new downward movements in inflation expectations. The decline should follow as energy price inflation is set to lower, whereas food price inflation should be less negative and core inflation is expected to remain stable at 0.8%.

Later this year, we forecast an increase to 0.7% partly as higher global food prices will increase food consumer prices. When the impact of the ECB’s easing measures kicks in and the recovery gains momentum, higher wage growth should support inflation. The weakening of the exchange rate will also remove a significant headwind to inflation.

Deflation index

In Danske Bank’s Euro Area Deflation Index, all countries remain with a score lower than zero. The euro area score stayed at -6 in July although actual inflation was lower. The unemployment rate continues lower, which is positive for the deflation index score.

• The scores of the core countries are low but supported by most activity indicators. The Dutch score has moved upwards to -6 from -8 as Q2 GDP was better than in Q1.

• 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 due to an adaptation of competitiveness, which is necessary to restore sustainable economic growth. Ireland has moved up to a score of -4 and is placed among the core countries in the index.