Eurozone: We expect inflation to increase sharply -  Danske

According to analysts from Danske Bank, inflation will increase sharply in the Eurozone, driven by higher crude oil prices.

Key Quotes:

“Euro area HICP inflation was slightly higher than expected in July as it increased to 0.2% y/y from 0.1% y/y in June (consensus 0.1%). The rise in inflation was mainly driven by food price inflation which was 1.4% y/y, up from 0.9% y/y in June. The lower oil price in July implied there was a monthly decline in energy prices of 0.9%, but the yearly inflation rate was only down at -6.6% from -6.4% reflecting that the base from last year pulled towards an increase in energy price inflation.”

“Core inflation was also slightly higher than expected as it remained unchanged at 0.9% y/y (consensus 0.8%).”

“Looking ahead, we expect headline inflation will increase sharply driven by a slightly higher oil price. Large base effects due to the drop in the oil price last year imply headline inflation is likely to go towards 1.0% at the end of this year if the oil price goes a bit higher than the current level.”

“The market is still pricing short-term inflation much lower than our forecast.”

“Currently, the ECB sees the risks to the growth outlook as tilted to the downside, but it is waiting for more information to assess the impact of the Brexit vote. We still believe the ECB will announce more easing in September as we foresee a weakening in economic data.”

“Market based inflation expectations are very low and we do not believe the ECB will be able to conclude inflation is on ‘a sustained adjustment consistent with its inflation aim’ implying it will extend the QE purchases beyond March 2017”