Eurostat's flash estimate released today showed Eurozone headline inflation recovered to 0.4% y/y in January, up from 0.2% in December. The more important core inflation increased to 1.0% y/y from 0.9% previously. Data highlights the European Central Bank's struggle in hitting its inflation target of just under 2 per cent. The ECB ultra-loose monetary policy has largely fallen flat without having much effect on the real economy.
After two months of weakening, core inflation, today's increase, by 0.13%-pt to be precise, is as small as it is important. Inflation is still way below the 2% ECB-target, but at least moving in a right direction. The ECB will have February monetary developments and inflation data to assess whether low oil prices are making their way into core inflation. Markets however unable to gauge how much to expect for March - and whether it will be sufficient for a notable weakening of the euro.
"We do not believe that the euro zone inflation rate will move very quickly towards the ECB inflation target. Besides still not anchored inflation expectations, the slack economy and barely rising credit demand, this should lure the central bankers into further loosening monetary policy possibly in March, possibly by lowering the deposit rate by a further 10 basis points", says Commerzbank in a research report.
