Macroeconomy

Inflation picking up in the euro area

We expect strengthening of wage growth to support a gradual increase in core inflation

Nadia Gharbi, Europe Economist

Inflation picking up in the euro area

Unless downside risks materialise or we see a significant deterioration in the labour market, we expect strengthening of wage growth to support a gradual increase in core inflation in the euro area in the months ahead. We forecast headline inflation to average 1.4% in 2020, compared with 1.2% in 2019 and core inflation to average 1.2% after 1.0% in 2019. Risks to our forecasts are tilted to the upside.

These forecasts follow Eurostat’s flash estimate for euro area inflation in December, which reported prices rising to 1.3% year on year (y-o-y) in December from 1.0% the previous month. The increase was largely driven by higher energy prices (0.2% y-o-y in December after -3.2% y-o-y in November). Food, alcohol & tobacco inflation strengthened somewhat, coming in at 2.0% y-o-y (+0.1pp) but core inflation was unchanged at 1.3%.

The gradual rise in core inflation we expect in the first half of this year may put some pressure on the ECB’s new chairperson, Christine Lagarde. That said, the key question for ECB monetary policy is whether the increase in core inflation will be sustained. We remain cautious on this point, expecting the ECB to maintain a very loose monetary stance in 2020 while fine-tuning some of its policy tools. Our baseline scenario foresees no change in policy rates in 2020 and a continuation of the ECB’s recently re-started QE programme at its present pace (EUR20bn per month) and with the asset composition unchanged.

Read full report here

Subscribe
Our views on the economy, markets and trends as a weekly digest, straight to your inbox.

We've sent you an e-mail.
Follow the instructions to confirm your subscription.

I didn't receive an e-mail