Base effects to drive Euro Area's inflation rate higher

Looking forward, base effects will be an important driver of Euro area's inflation rate. Between September 2014 and January 2015, the Brent oil price fell from USD 97/b to 53/b. The subsequent fall in the HICP energy index subtracted 0.7 percentage points from the inflation rate that reached its trough at -0.6% y/y in January 2015. 

"By and by, the steep fall in energy will fall out of the inflation rate, unless oil prices nosedive again which is not expected. The headline rate could still be negative in October, but they are expected to rise to around 1% in January 2016", says Nordea Bank.

ECB policy makers are worried about subdued inflation expectations. But of course they are also aware both of the beneficial effect of low inflation on the economy and of the upcoming base effects. By all experience, rising actual inflation also lifts long-term inflation expectations. 

"ECB is expected to extend the asset purchases beyond September 2016 at some point, not because of the low current prints but to make sure inflation will come closer to target in one to two years time. The next ECB policy meeting on 22 October is most likely for watching, not for acting", added Nordea Bank.