Danske Research Team
Danske Bank A/S
Inflation outlook
We expect euro inflation to decline back to 0.3% y/y in November and believe core inflation will reach a new historical low of 0.6% y/y (due for release on Friday). Another fall in core inflation increases the likelihood of more easing from the ECB, as Mario Draghi has recently mentioned that low inflation is due not only to temporary factors, which the ECB can ‘look through’, but also because core inflation is affected by weak demand.
We expect the ECB to lower its inflation projections in December but it has already indicated that this is underway. According to the ECB’s chief economist Peter Praet, the projections could be revised to match the European Commission’s outlook. This would imply a lowering of the inflation forecast for 2015 from 1.1% to 0.8%.
Low inflation expectations are also putting pressure on the ECB. The 5Y5Y inflation expectation is again below 1.8%, while the inflation expectations in the Survey of Professional Forecasters have declined for all horizons. However, we expect the ECB to remain on hold until 2015, as it waits for the take-up of the TLTRO in December.
Deflation index
In Danske Bank’s Euro Area Deflation Index, the score for the euro area has increased to -6 in October from -7 in September, when headline inflation was 0.3% y/y. The current score of -6 is lower than when headline inflation was negative in 2009. This reflects the current lower core inflation and wage growth together with a higher unemployment rate.
The scores of the core countries remain low and the slower recovery has weakened the outlook for higher inflation in these countries.
The periphery countries are at the low end of the index and inflation is set to remain weak as high unemployment continues to limit wage pressure. Ireland has a less negative score as core inflation is supported by higher house price inflation.
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