ECB’s core inflation forecast is still too optimistic – Danske Bank

Pernille Bomholdt Henneberg, Senior Analyst at Danske Bank, notes that the ECB revised its headline inflation projection considerably higher in 2017, lifting it slightly in 2018 while keeping it unchanged in 2019.

Key Quotes

“The higher near-term inflation forecast reflects higher energy and food price inflation forecasts from the ECB whereas the core inflation projection was unchanged at 1.1% in  2017.”

“The ECB revised its core inflation forecast slightly higher for 2018 and 2019 by 0.1pp in both years due to ‘some indirect and second-round effects from higher oil prices, as well as some upward effects from the lower euro exchange rate’.

“In our view, the ECB’s core inflation forecast is still very optimistic due to the following:

1. The ECB’s core inflation forecast hinges on higher wage growth

2. Labour market slack suggests wages will stay low in 2017-18

3. Even German wage growth is low despite the tight labour market

4. The ECB’s model for core inflation is subject to mean reversion.”

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