Eurozone: the May inflation rate may spring a surprise - Commerzbank

Analysts at Commerzbank provides a detailed preview of what to expect from the Eurozone flash CPI report slated for release later on Thursday at 0900 GMT.

Key Quotes:

“In the eurozone, the May inflation rate may spring a surprise as it could surge by 0.6 percentage points to 1.8%. The reason for this is not only the sharp rise in energy prices but also the correction of the core inflation rate. 

After an unexpectedly sharp fall to 0.7% in April, the rate should leap back to 1.0% in May. 

Inflation data in May are likely to provide short-term relief for members of the ECB Governing Council. 

The core inflation rate, i.e. the year-on-year rate of change in the consumer price index excluding volatile prices for energy, food, alcohol and tobacco, should make up for the slump of 0.7% in April and climb back to 1.0%. This is mainly due to the inflation rate for package holidays and accommodation, which was strongly influenced by the early Easter holiday. After plunging in April, it should return to its trend rate of about 3%. 

The headline inflation rate should even climb from 1.2% in April to 1.8% (consensus: 1.6%), as energy prices rose by 2% in May compared to April, while a monthly decrease of 1.2% was recorded in May 2017. 

Consequently, the inflation rate for energy will climb from 2.6% to around 6%, which in itself will boost inflation by more than 0.3 percentage points. 

That said, the "normalization" of the core inflation rate does not change the fact that the ECB must once again bury its hope of a sustained rise in the core inflation rate in the course of 2018. One reason is the significant appreciation of the euro. Since April 2017, the euro has gained just under 9% against the currencies of 38 main trading partners. This will hold down the inflation rate for industrial goods ex. energy in particular. We expect the ECB to correct its core inflation projections of 1.1% for 2018 and 1.5% for 2019 slightly downwards in June.”