Eurozone: Measured inflation in the region - BBH

The research team at BBH explains that three forces have driven up measured inflation in the Eurozone, raising the tenor of the persistent low-level murmur that the ECB policy is too loose.  

Key Quotes

“First, and the most obvious, is higher energy prices.  Second, was the poor winter crop that lifted the price of some vegetables.  Third are the distortions caused by the calendar effect of Easter.  These forces are unwinding.”

“The recent gains in the headline (from 1.1% at the end of 2016 to 2.0% in February and 1.9% in April) could have been halved in May.  The core rate had fallen to 0.7% in March.  The cyclical low was 0.6% in Q1 2015.  It jumped to 1.2% in April.  It can fall back to 0.9%-1.0% in May.  While Eurozone unemployment is expected to have edged lower in April (9.4% from 9.5%), wage growth, including in full-employment Germany, remains subdued.”

“This will be understood by the ECB's staff as they finalize their new forecasts for the ECB meeting June 8.  The rise in European rates and the strength of the euro would suggest that the market has already discounted as a fact the kind of risk assessment tweaks the central bank may offer.  Since the ECB will not stop the asset purchases abruptly and the current purchases are projected through this year, purchases will probably continue into next year, by which time, the Fed's balance sheet would have likely begun shrinking and a couple more interest rate hikes will probably have been delivered.”