ECB QE likely to improve euro area inflation outlook

Given preliminary signs that Euro Area's accommodative monetary policy is working, the sovereign bond QE launched by the ECB is likely to improve the euro area inflation outlook. However, any potential positive effect is likely to take time to unfold.

"Despite the recent increase in Euro Area's headline and core inflation, it is too early to expect a strong upward inflationary trend. Headline inflation is still expected to average +0.2% this year and +1.2% next year, and core inflation to be +0.8% in 2015 and +1.0% in 2016; risks are broadly balanced", says Barclays.

The recent rise in headline inflation was mainly led by volatile sub-components, which, despite a timely correlation with currency swings, are not the best indicators to assess whether a sustained return of inflation towards the ECB's medium-term mandate is likely.

Therefore, we believe the ECB will likely focus more on underlying developments within the HICP inflation basket, including non-energy industrial goods (NEIG) and services prices, to mark-to-market whether deflation risks have declined and eventually to what extent.

The only inflationary trend that appears to be consistent with an improved medium-term underlying price outlook is for NEIG prices. Even within that component though, the June data show that its upward trend was mainly led by the durable goods component, which accounts for just 8% of the HICP basket.

"Risks are broadly balanced. The FX pass-through transmission mechanism may spread across the NEIG component, while unprocessed food prices could continue to rise longer than. Contrary to this, the contribution to headline inflation stemming from energy prices may soften in the short term. Finally, the services inflation outlook remains critical but highly uncertain. Secular disinflation will continue in the coming quarters", added Barclays.